ORDER OF ADJUDICATING OFFICER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF M/s. ANNAPOORNA & CO.
1. BACKGROUND
Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of M/s. Annapoorna & Co., sub broker holding SEBI Registration Number INS230724614, affiliated to BGSE Financial Ltd., member of National Stock Exchange of India Ltd. (NSE), (hereinafter referred to as “M/s. Annapoorna & Co.” or the “sub-broker” or the “noticee”)., and pursuant to this appointed me as adjudicating officer vide order dated March 22, 2004 under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to inquire into and adjudge under sections 15F (a), 15 HB of the SEBI Act.
2. NOTICE
Pursuant to this a notice dated March 26, 2004 under Rule 4 (1) of the said rules was issued to sub-broker communicating the charges levelled against them based on inspection of the books of accounts and other documents conducted by SEBI.
3. REPLY
Reply to the aforesaid notice was received vide letter dated April 13, 2004 of the sub-broker, in which the sub-broker submitted a detailed reply.
4. PERSONAL HEARING
The personal hearing in the matter was granted on June 17, 2004. Shri Jagdish V. Ahuja , Proprietor, of the Annapoorna & Co. appeared before me and made submissions on behalf of the sub-broker.
5. FINDINGS, ANALYSIS AND CONCLUSIONS
The undersigned has taken into consideration the findings of the inspection report, the material available on record, the reply of the sub-broker and the submission made by the sub broker during personal hearing. The findings in respect of the allegations against the Sub-broker are as follows:
(a) Irregularities in maintenance and issuance of contract notes/confirmation memo
As per the inspection report contract notes do not bear pre-printed serial numbers. The computerised nos. generated is also on daily basis and not on annual basis. The contract notes are being sent by email by way of attachment file and therefore, the acknowledgement of the customer is not available on the duplicate of the contract notes. Besides the email do not bear the signature of the authorised official. The brokerage is not shown separately on the contract notes.
The sub-broker has submitted that they are issuing split contract notes and sent through email followed by bills. All the copies of the contract notes are available in the Outlook Express evidencing despatch and the same is also available in their system. Contracts are system generated and no manual intervention is possible and is generated based on internal computer generated unique client number which cannot be changed. The contracts are being serially generated on a yearly basis.
This explanation of the sub-broker does not appear to be satisfactory in view of the fact that contract note is the prime document establishing the prime contractual relationship between the client and the sub-broker. However I have considered the fact that the sub-broker has already taken corrective steps.
(b) Non collection of margin money from clients
It was mentioned in the inspection report that margin money not collected by the sub-broker as per circular number SMDRP/POLICY/CIR-33/2000 dated 27/7/2000. M/s. Annapoorna & Co. collecting margin money partly.
The sub-broker has submitted that “no specific instance has been pointed out by the inspectors and therefore, we are unable to comment specifically. As a practice we obtain mandate from the clients to treat the securities / funds lying with us towards margin. Moreover, many of our clients are having group / family accounts and on an aggregate basis our risk exposure to any parties at a given time is within the parameters followed by us.”
Several instances have been recorded in the inspection report where the members have failed to collect the margins and inadequate margins have been maintained for the clients. The broker did not furnish any evidences regarding collection / maintenance of margins in such cases. Keeping all these in view the explanation of the broker is not acceptable.
(c) Inadequacy in maintaining client database
As per the inspection report in case of the clients where the agreements are available there are so many irregularities such as the date of agreement, signature of the sub-brokers and photographs of the clients are not available.
The sub-broker has submitted that “they have taken agreements in all cases and the discrepancies have since been rectified”.
I consider the discrepancies more of a technical nature and that the sub-broker has taken corrective measures, a lenient view has been taken.
(d) Conducting business in a manner with the sole intention of generating brokerage commission
As per the inspection report the sub-broker has transferred some of the brokerage to Ashik N. Tali as an incentive commission.
The sub-broker has submitted that in order their promote their reach and services to customers they have employed Shri Ashik N. Tali purely on a commission basis and not a fixed salary. Hence the commission is paid to him on the brokerage earned. It was pointed out by the inspectors they have discontinued this practice.
I found that the brokerage charged at rates much below the prescribed ceiling limits and in due compliance of the rules and byelaws of the exchange and since they have discontinued the practice I do not find liable for any penalty.
(e) Non segregation of own funds from clients funds
As per the inspection report the sub-broker is having client bank account at Andhra Bank and availed an over draft facility in that account against a fixed deposit given by them. The sub-broker is not maintaining separate bank account for each exchange.
The sub-broker submitted that “we are maintaining separate accounts for our client transactions and proprietary transactions. We have deposited a sum of Rs.10 lakhs to tide over the temporary delay in clearing of cheques from clients and for unforeseen delay in payments by clients. It is not true that we have used the clients money for our own purposes. Certain withdrawals made that being part of our brokerage earned or for payment of service tax”.
I have considered the explanation given by the sub-broker and the records submitted before me and find that the submission of the sub-broker is satisfactory.
(f) Acting as unregistered sub-broker to NSE broker
As per the inspection report, the sub-broker dealt with M/s. Canny Securities Pvt. Ltd. without approval of SEBI. They applied for registration as a sub-broker of the NSE broker but the same was rejected by SEBI.
The sub-broker submitted “we had made an application for registration as a sub-broker of M/s. Canny Securities Pvt. Ltd. NSE member in December 2000 and we have been acting as sub-broker to them till March 2002. Our application was unfortunately rejected by NSE stating the reason that we are already a sub-broker of NSE through BGSE Financials Ltd.”.
I find that acting as an unregistered sub-broker is a serious violation. However, since the broker was already registered as a sub-broker through BGSE Financial Ltd. and SEBI was earlier granting multiple registrations as sub-brokers through various brokers. I find that the sub-broker has accordingly made an application to SEBI. I have considered his submissions while imposing the quantum of penalty.
(g) Repeated violations of earlier inspections
Inspection report quoted to earlier inspection report of SEBI dated 22/6/2002 and BGSE Financial Ltd. inspection report regarding alleged irregularity in collection of margin money from clients.
The sub-broker submitted that they were not inspected by SEBI in June 2002. They reiterate that they have been practicing robust risk management system so that the margins are collected periodically. They have not failed in payment of margins to the stock exchanges nor defaulted any pay-in.
I consider the reply by the sub-broker as satisfactory since no specific instance has been given in the inspection report.
6. IMPOSITION OF PENALTY
The undersigned has taken into consideration the facts and circumstances of the case, the material available on record and submissions by the sub-broker.
Keeping all above in view, I find that there were certain deficiencies and irregularities in the systems and procedures of the sub-broker and has failed to strictly comply with the provisions of the Act, Regulations and directions issued by the Board from time to time and has not exercised adequate due skill, care and diligence in their operations.
Considering all above facts and circumstances , I am of the view that the sub-broker has become liable to penalty and some amount of penalty need to be imposed upon them for certain violations as described in detail in the earlier paragraphs, so that they comply with all the regulatory requirements in future strictly. This is also necessary to maintain the integrity of the securities market and to protect the interest of investors.
In order to adjudge the quantum of penalty, I have considered the following factors as provided in the Section 15J of Securities and Exchange Board of India Act ,1992:
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 and
c) the repetitive nature of the default.
As regards the disproportionate gain or unfair advantage there are no quantifiable figures available with respect to the default observed on the part of the sub-broker. There are also no figures or data to quantify the amount of loss caused to an investor or group of investors as a result of the default. Besides, no investor complaints have been received against the sub-broker. However, as for the reasons stated above the monetary penalty needs to be imposed on the sub-broker.
7. ORDER
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.20,000/- (Rupees Twenty Thousand only) on the sub-broker. The sub-broker shall pay this amount of penalty of Rs.20,000/- 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 the Chief General Manager, MIRS Department, 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 sub-broker and a copy is submitted to the Board.
Date : December 31, 2004
Place : Mumbai
P.K. KURIACHEN
ADJUDICATING OFFICER