ADJUDICATION ORDER IN RESPECT OF M/S MARFATIA ASSOCIATES– SUB BROKER TO VSE SECURITIES LTD., MEMBER BSE UNDER SECTION 15 I OF THE SEBI ACT READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTY BY ADJUDICATING OFFICER) RULES, 1995
1. BACKGROUND
Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of. M/s Marfatia Associates, having SEBI Registration No. INS010589310, a Sub Broker affiliated to VSE Securites Ltd. (SEBI Registartion No. INB011076230), member BSE. The findings of the inspection were communicated to sub-broker M/s Marfatia Associates (hereinafter referred to as Sub-Broker) vide letter dated July 3, 2003. Pursuant to this the sub-broker replied vide letter dated July 19, 2003. After considering the sub-broker’s reply, the undersigned was appointed 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 the alleged contravention of the provisions mentioned in the said order.
2. NOTICE
Pursuant to this a notice dated September 20, 2004 under Rule 4 (1) of the said rules was issued to the sub-broker communicating the charges levelled against them based on inspection of the books of accounts and other documents conducted by SEBI.
3. REPLY
The sub-broker replied to the notice vide its letters dated October 14, 2004 and October 20, 2004
4. PERSONAL HEARING
A personal hearing in the matter was granted to the sub-broker on 18th November 2004 at SEBI Head office at Mumbai. Shri Nishil Marfatia, Proprietor M/S. Marfatia Associates appeared and made submissions on behalf of the sub- broker.
5. CHARGES, REPLIES AND CONSIDERATION OF EVIDENCE :
(a) The sub-broker has failed to maintain proper segregation of client funds and own funds in violation of regulation 26 (xiii) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
The sub-broker has stated that he had utilised funds from client’s account subsequent to transfer of funds to his own account. The sub-broker also stated that brokerage amount paid by the clients were retained by it in client’s account only as it helps in meeting its working capital requirement and the same is withdrawn as and when required. He further submitted that he has not utilised a single penny of clients money and withdrawals made by it were its own funds arising out of brokerages collected from the clients. Sub-broker produced copies of bank statement in support of his submissions.
I find that the sub-broker has transferred his own funds arising out of brokerages collected from the clients which were accumulated in the client’s account to his own account. It was also explained that the amount so transferred to his own account matches with the balance of brokerage lying in the clients accounts. In view of the above, I do not find that the sub-broker has violated the provisions of the said regulation regarding segregation of client funds and own funds.
(b) The sub-broker dealt with unregistered Sub-brokers in violation of regulation 26 (xiv) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
The sub-broker stated that in a span of three years only few such transactions have occurred. The sub-broker has further submitted that he dealt with them as his client only and was not aware whether these clients acted on behalf of others. Further, he submitted that he had no facilities by which he could immediately verify the account from which the clients were transferring the shares as he was receiving the demat transaction report after a considerable period.
In this regard, I find that the sub-broker had not dealt with the unregistered sub-brokers frequently and he had executed only few transactions with them. In view of the above, I accept the sub-brokers replies in this regard.
(c) The sub-broker acted as unregistered Sub-brokers in violation of regulation 26 (xiv) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
The sub-broker has submitted that since he was a member of Vadodara Stock Exchange, he acted as a principal broker and the transaction with members of NSE were carried out on principal to principal basis. The total turnover of these transaction was less than one percent of the sub-brokers total transactions. The same has been discontinued from 31/12/02 well before the inspection was carried out in June 2003
Keeping in view the explanation of the sub-broker, and the fact that the sub-broker had already discontinued such dealings well before the inspection, I take a lineant view on this count while arriving at the penalty.
(d) The sub-broker indulged in off the floor transactions in violation of regulation 26 (xv) and 26 (xvi) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
The sub-broker has submitted that only six transactions had been carried out and the quantity carried out is insignificant. He further stated that he entered into transactions as some of his clients had sold shares and they were not able to cover up the positions on the same day as the scrips had touched circuit filter There were some other clients of this sub-broker who were ready to sell the shares. So to protect his clients from incurring losses arising out of short delivery and auction, he entered into these off floor transaction for his clients after taking written consent from them. Rest few of the transactions were entered due to ignorance of one of his employees.
I find that the sub-broker has accepted the findings on entering into off-market transactions and their non-reporting to the Exchange. Thus the sub-broker has violated Regulation 26 (xv) and 26 (xvi) of Sebi (SB&SB) Regulations, 1992.
6. IMPOSITION OF PENALTY - ORDER
The submissions of the sub-broker have been considered 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.15,000 (Rupees Fifteen Thousands) on the sub-broker. The member shall pay this amount of penalty of Rs. 15,000/- 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 sub- broker and a copy is submitted to the Board.
DATE: DECEMBER 01, 2004.
PLACE : MUMBAI
ADJUDICATING OFFICER