ADJUDICATION ORDER UNDER SUB-SECTION (1) OF RULE 5 OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995. RELATING TO M/S. DYNAMIC STOCK BROKING (INDIA) PVT. LTD., (INB 01163632) BROKER OF BOMBAY STOCK EXCHANGE.
1. BACKGROUND
1.1 M/S. Dynamic Stock Broking (India) Pvt. Ltd., (hereafter referred as “broker”) is a member of the Bombay Stock Exchange, Mumbai (here after referred as “the BSE”). An inspection of the books of accounts, documents and other records maintained by the broker during the period November 20, 2001 to March 31, 2003 was conducted during the period May 21st to June 9th of year 2003, through M/s M. B. Agrawal & Co, Chartered Accountants (hereafter referred as “inspector”) appointed by Securities and Exchange Board of India (hereinafter referred to as “SEBI”).
2. ADJUDICATION PROCEEDINGS
2.1 Based on the violations observed in the inspection report, and pursuant to the broker’s reply the Whole Time Member, Shri T. M. Nagarajan has, in terms of the powers conferred upon him under Section19 of the SEBI Act 1992 (hereinafter referred to as the “Act”) read with Section 15-I of the Act and Rule 3 of SEBI (Procedure for holding Inquiry and imposing Penalties by Adjudicating Officer) Rules, 1995, appointed the undersigned as the Adjudicating officer vide order dated March 22, 2004, to enquire into and adjudge the alleged violations committed by the broker as given below:
( a ) Transferred securities belonging to clients to own account without consent in violation of Section 15F(b) and 15 HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "Act") read with Regulation 26 (vi) and 26(xv) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the "Regulations");
( b ) failed to obtain/ maintain client registration forms in violation of Section 15B of the Act read with Regulation 26(xii) of the Regulations
( c ) failed to obtain/ maintain member- client agreement forms in violation of Section 15B of the Act read with Regulation 26(xii) of the Regulations
( d ) not adhered to unique client code for uploading the codes to the exchange in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;
( e ) failed to issue contract notes in the form and manner prescribed in violation of Section 15F(a) of the Act read with Regulation 26(iii) , 26(xv) and 26(xiv) of the Regulation;
( f ) not maintained margin deposit book in violation of Section 15 A(c ) and 15HB of the Act read with Regulation 26(iii) , 26(xv) and 26(xvi) of the Regulations;
( g ) failed to comply with directions issued by the Board in violation of Section 15HB of the Act read with Regulation 26(xv) of the Regulations;
( h ) not exercised due skill, care and diligence in violation of Section 15HB of the Act read with Regulation 26(xvi) of the Regulations.
3. SHOW CAUSE NOTICE AND HEARING
A show cause notice under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995 was issued by the undersigned on September 17, 2004 to the broker to show cause as to why penalty under the provisions of the Act read with Rule 5 of SEBI (Procedure for holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 should not be imposed upon him in view of the alleged violations. The broker failed to submit his reply to the show cause notice even after the reminders. However an opportunity for personal hearing before the undersigned was given to the broker on November 25, 2004. The broker was advised to submit his reply if any while attending the personal hearing. The broker, during his personal hearing on November 25, 2004 explained his position with respect to the findings of inspection report and the alleged violations of SEBI Regulations / Rules / Guidelines and submitted his written reply to the show cause notice. The broker’s submission below includes his written reply as well as submission during the personal hearing.
4. REPLIES AND FINDINGS
4.1.1 Transferred securities belonging to clients to the broker’s own account without client’s consent: The alleged violation is that the broker has transferred securities belonging to clients to own account without the client’s consent in violation of Section 15F (b) and 15 HB of the Act and the regulations.
Following observations regarding the discrepancies were made in the inspection report
a) Delivery of securities due to 29 clients were transferred to the members’ beneficiary account. No consent letters were available from the clients
b) Delivery of 472 equity shares of a client (Ms.Bharati) was utilized for meeting the securities pay in obligation of brokers own trades.
c) In 2 separate instances 500 shares and 322 shares, delivery of securities due to one client was transferred to another client.
4.1.2 The broker’s reply to the above mentioned allegations are as follows.
a) Clients insist to keep the shares purchased by them in broker’s beneficiary account to enable them to sell them at ease, to prevent any chances of auction. Since the clients trade on a consistent basis, a general consent letter is made available at the time of registration itself that he wishes to maintain his shares in the broker’s beneficiary account. This is true in all the 29 instances.
b) Broker had agreed submit his reply in this allegation by November 25, 2004 which was not complied.
c) In the mentioned instance there were multiple clients having delivery obligations in the same scrip. As a result a part of the delivery obligation was internal amongst two different settlements. A client purchasing shares in the initial settlement sold it subsequently which were bought by another client. Instead of initially passing on an inter settlement instruction, the shares were directly delivered to the subsequent client (buyer) from the initial settlement of purchase.
4.1.3 Considering the findings of the inspection and the replies of the broker it is observed that the broker’s claim that he holds the general consent letter from the clients for transferring the client’s shares to the brokers beneficiary account is not acceptable as it is not meant for normal routine transaction. It is meant for only extreme conditions. Further the member had failed to submit part of the details. In view of the above I agree to the department’s view that that the broker had violated provisions of Para B (1) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 and SEBI circular No. SMD/SED/Cir/93/23321 dated November 18, 1993.
4.2 Failed to obtain/ maintain client registration forms
4.2.1 In client registration forms, following discrepancies were noted
a) In 8 cases, photographs were not collected
b) In 21 cases, proof of residence was not available
c) In most of the cases annual income was not specified.
4.2.2 The broker has replied that many a times the clients do not provide with their income details. As there is a delay from the part of the client to furnish the information, there is a fall out in the compliance of the specified requirements. Also many a times it happens that the clients sign the agreement immediately and confirm to submit the requisite proofs subsequently, but even after repeatedly reminding fail to do the same. The broker further stated that they ensure to obtain PAN, photo identity proof and residence proof as the bare minimum requirements before registering the client.
The broker during his submissions on the hearing submitted that the information is available for all the running account clients and efforts were made to collect the same for non-operative clients. The broker further stated that the photo identity proofs of all the active clients are available with them. Proof of residence is available in all the cases. In the said 21 cases they have a single proof of residence instead of the mandatory two proofs. Clients generally do not provide them with the income details as a result of which the KYC are incomplete to that extent. Now they have updated their records for the said 8 cases where the photo identity proofs were missing. With respect to the proof of residence, he (Mr.Gitesh R Shah, Director) agreed to confirm the details by November 25, 2004.
However the broker failed to furnish the said information to SEBI.
4.2.3 After examining the Inspection report and the replies of the broker it is seen that the broker was not exercising proper care in fully complying with the KYC requirements. Further the information agreed to be submitted by November 25, 2004 has not been submitted.
Thus from the above I find that the broker was not properly maintaining the client registration forms there by violating provisions of SEBI circular No. SMDRP/Policy/Cir/5-97 dated April 11, 1997.
4.3 Failed to obtain/ maintain member-client agreement forms.
4.3.1 The member-client agreements were not available in 16 instances.
4.3.2 The broker during the hearing had submitted that he has collected the member- client agreements in those 16 instances mentioned in the inspection report.
During the hearing he agreed to submit a copy of the same by November 25, 2004. However the copies of the documents were not produced before the adjudicating authority on the promised date.
4.3.3 After considering the findings of the inspection report and the replies from the broker I agree with the observation of the inspection department that the broker had violated SEBI Circular no. SMD/Policy/Cir-39/2001 dated July 18, 2001 read with Section 15 B of Securities and Exchange Board of India act 1992 in this regard.
4.4 Not adhered to the unique client code by uploading the codes to the Exchange
4.4.1 In 13 cases, unique client code was not uploaded to the exchange although the turnover was above Rs 1,00,000.
4.4.2 The broker had not replied with respect to this to the inspection department. However, the broker in his reply to the Show Cause Notice vide letter dated November 25, 2004 submitted that they have duly complied with the uploading of the unique client codes to the exchange and they have no pending details to be uploaded to the UCC facility of the exchange. During the hearing he reiterated that there are no pending client codes for updation as on date and he had done the same for the referred 13 cases also. However no documentary evidence was submitted on this behalf.
4.4.3 After taking into account the inspection report and the replies from the broker, it is seen that the broker had violated the provisions of SEBI Circular No. SMDRP/Policy/Cir-39/2001 dated July 18, 2001. However it appears that they have rectified the lapse after the inspection. Since the lapse was rectified and the member ensured sufficient care to prevent any recurrence in the future, the submissions are accordingly considered.
4.5 Failed to issue contract notes in the form and manner prescribed.
4.5.1 Following discrepancies were noted in the issuance and maintenance of contact notes
a)Contact notes did not bear running serial number and it was put on a daily basis.
b) Contact notes were not issued in the prescribed format. The point with reference to the clauses regarding “correction & interpretation of award” and “setting aside of award and fresh reference” not being stated which was raised during the BSE inspection was not rectified by the member.
c)In 25 instances, PAN was not printed in the contact notes whose value exceeded Rs 1, 00,000/-
d) The acknowledgment of the contact notes was not dated and in 5 cases the acknowledgment was absent.
4.5.2 The broker replied with regard to the above mentioned discrepancies as follows.
a) The broker had stated that the contract notes were numbered on a settlement wise client wise basis as it helps in easy identification for operation purpose. The contract numbers are system generated and the log can be obtained from the system.
b) The broker stated that the deficiencies were unintentional and do not provide any misleading information to the client. The broker further stated that they have taken note of the discrepancies in the preprinted format of the contract notes issued to the clients and undertake to correct the same in conformity with the prescribed format.
c) The broker had not replied regarding the observation mentioned in 4.5.1(c).
e) Contract notes are issued to clients on a daily basis. In certain cases the contract notes and bills are directly couriered to the clients and for the rest, clients collect the contract notes either in person or through their authorised persons. A confirmation to this effect from the clients can be obtained, if required.
4.5.3 After examining the findings of the inspection report and the replies of the broker I find that the broker was issuing contract notes which were not exactly in the prescribed format. I agree with the inspection department’s finding that the broker has violated the provisions of SEBI circular No. SMD/MDP/Cir/043/96 dated August 5, 1996, SEBI circular No. SMD-1/23341 dated November 18, 1993 and provisions of Clause B (2) of Code of Conduct prescribed under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992, read with section 15F(a) of Securities and Exchange Board of India act 1992.
I also agree with the department’s view that all the clauses prescribed by the exchange must be duly complied with, failure to do so will lead to non –compliance and may hinter arbitration proceedings.
4.6 Not maintained margin deposit book.
4.6.1 It has been alleged that the order book and the margin deposit book was not maintained by the broker.
4.6.2 The orders are received over telephone and punched in instantly into the system and so no order book is separately maintained. However, the details are available in the system. The margins are collected from many clients on adhoc basis and the same are reflected in their accounts statements. Also clients request to adjust the credit balance in their accounts to be apportioned towards their margin obligations. The party ledger reflects the transactions done and the client is always provided with a copy of the same at his request. They have preserved the soft copy (down loaded) of the margin reports made available by the exchange on a daily basis. Date wise margin reports are available with them and the same can be made available if needed. The broker further stated that the amount deposited with the exchange towards margin is also separately accounted under the head “Capital adequacy Deposits with the exchange”. Also a separate record is maintained for the bank guarantees deposited with the exchange towards capital adequacy.
4.6.3 After taking into account the inspection report and the replies of the broker it is observed that though the broker has not maintained separate Margin deposit book, the same was accounted and reflected in the accounts of the broker as margin. Hence I do not find any violations in this count.
5. CONCLUSION
The alleged violations as mentioned above are for the years 2001-2003, while the Regulation 26 (v) (vi) (xii) (xiv) (xv) and (xvi) (xix) of Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Regulations, 1992 were effective from November 20, 2003. The undersigned is of the opinion that the said Regulations are there fore not applicable to the present case.
However it is seen, as discussed in the pages above, that the broker had not adhered to the Code of Conduct prescribed under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with Clause A (5) of Code of Conduct prescribed under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 by violating the following SEBI regulations and circulars.
1. Para B (1) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 and SEBI circular No. SMD/SED/Cir/93/23321 dated November 18, 1993. (Para 4.1)
2. SEBI circular No. SMDRP/Policy/Cir/5-97 dated April 11, 1997. (Para 4.2)
3. SEBI Circular no. SMD/Policy/Cir-39/2001 dated July 18, 2001 read with Section 15B of Securities and Exchange Board of India act 1992 (Para 4.3).
4. SEBI circular No. SMD/MDP/Cir/043/96 dated August 5, 1996, SEBI circular No. SMD-1/23341 dated November 18, 1993 and provisions of Clause B (2) of Code of Conduct prescribed under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with Section 15F(a) of Securities and Exchange Board of India act 1992 (Para 4.5).
6. ORDER
The submissions of the broker have been considered and dealt in detail as above and in view of the findings arrived at, I consider it to be a fit case for imposition of penalty under section 15 HB of the SEBI Act, 1992. In view of the same and in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the Securities & Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose a penalty of Rs.50,000/- (Rupees Fifty Thousands only) on the broker Dynamic Stock Broking (India) Pvt. Ltd. The member shall pay this amount of penalty of Rs.50,000/- by way of demand draft in favour of "SEBI - Penalties Remittable to Government of India" payable at Mumbai within 45 days of receipt of this order.
The said demand draft should be forwarded to Ms. Usha Narayan, Chief General Manager of SEBI, MIRS Department (DPS- I) at SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
In terms of Regulation 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, a copy of this order is served on the broker and a copy is submitted to the Board.
Adjudication Officer
December 01, 2004.