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ORDER OF ADJUDICATING OFFICER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF M/s. MACO SECURITIES PVT. LTD.
1. BACKGROUND
Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of M/s. Maco Securities Pvt. Ltd., sub- broker holding SEBI Registration Number INS230656337, affiliated to BGSE Financial Ltd., member of National Stock Exchange of India Ltd. (NSE), (hereinafter referred to as “M/s. Maco Securities Pvt. Ltd.” 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 15A(c), 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 12, 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 Mahesh Bajaj, Director, of the Maco Securities Pvt. Ltd. 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. Time of placing order is not printed on the contract note. Stamps are not affixed.
The sub-broker has submitted that the irregularities pointed out by the inspectors have been rectified such as the notes are now pre-numbered and that they are taking all precautions to comply with the requirements.
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. The sub-broker is not collecting margin from the clients on settlement basis. They have collected margins from few clients. It was repaid at the end of the financial year.
The sub-broker has submitted that they collect full consideration on the following day (T+1). They have endeavoured to collect the margins to the extent justified by the clients dealings with us in the normal course of business.
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 sub-broker did not furnish any evidences regarding collection / maintenance of margins in such cases. Keeping all these in view the explanation of the sub-broker is not acceptable.
(c) Inadequacy in maintaining client database
As per the inspection report applications are entered in the old format for accounts opened prior to April 2002 and agreements were not made available to the inspection team for verification.
The sub-broker has submitted that “we have omitted to take the agreements from clients prior to April 2002 inadvertently. We have now obtained client agreements from all our clients”.
The omission of the sub-broker is serious however, the corrective steps taken by them are considered favourably.
(d) Non-maintenance of books of accounts and records
As per the inspection report the books are maintained as part of computerised accounting system. Printouts from the software are being taken only if and when required and not otherwise. Unable to verify the records pertaining to year 2001-02 as the hard disk was crashed and the corresponding backup files were corrupted.
The sub-broker submitted that “in the initial period, we had certain problems which have since been rectified and we have been maintaining all records both soft and hard. We used to receive orders from the clients over phone which is directly punched into the system and confirm over phone itself followed by contract notes and bills.
I find that the sub-broker has rectified the irregularities and that the discrepancies were transitional nature a lenient view is taken.
(e) Non segregation of own funds from clients funds
As per the inspection report the client’s funds were not segregated from own funds at Hospet Branch.
The sub-broker submitted that “we have recently opened the Hospet Branch and have now opened separate bank account for own account / client account as directed.
I find that the sub-broker has rectified the irregularities and that the discrepancies were transitional nature a lenient view is taken.
(f) Delay in payments / delivery to clients
As per the inspection report, there has been delay in delivery of security to certain clients.
The sub-broker submitted that in certain instances the securities and funds were kept with them at the instance of the clients for making purchase or sale on subsequent trading base. They have stated that they have taken mandate from the clients for doing so. Sometimes the deliveries had to be withheld in view of non-settlement of dues by the clients.
I find no complaints against the sub-broker in this regard and the discrepancies observed were of technical in nature.
(g) Issuing cheques to third parties and dealing with other intermediaries
As per the inspection report the recipient name entered in the bank book is different from the payee name mentioned in the bank statement.
The sub-broker submitted that as regards banks transactions with clients, the same is supported by specific request / confirmatory letters of the client’s consent. KPR Securities is their client and at few instances they have issued cheques as instructed by them to their relative or family members.
I find no complaints against the sub-broker in this regard and the discrepancies observed were of technical in nature.
(h) Delay in pay of margins and pay-in to the exchange
As per the inspection report there were delays in payment of margins /pay-in to BGSE Financial Ltd.
The sub-broker submitted that there have been marginal delays in payment of margins / settlement of trades with BGSE Financial Ltd. due to their financial constraints / bank clearance problems. The sub-broker admitted the violation.
(i) Charged interest on amount advanced on spot payments
The inspection report detailed instances of charging interest on amount advanced for spot payment.
The sub-broker admitted that in some cases they have made spot payments based on specific request from clients and depending upon the availability of surplus funds with them and they were not doing it as a practice.
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 in order.
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