ORDER OF ADJUDICATING OFFICER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF M/S ORIENTAL STOCKS
1. BACKGROUND
Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of M/s Oriental Stocks, sub-broker holding SEBI Registration Number INS010916810, affiliated to MSE Financial Services Ltd., member of The Stock Exchange, Mumbai (BSE), (hereinafter referred to as “M/s Oriental Stocks” 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), 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 15, 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 May 27, 2004. Shri V. Nagappan, Proprietor, of the Oriental Stocks appeared 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) Failed to maintain order book and margin deposit book
As per the inspection report the sub-broker does not maintain the order book and margin deposit book.
The sub-broker submitted “since the launch of online trading we take orders over phone and put in to the system immediately and no separate order book is maintained. At the end of the day a print out is taken for the executed as well as the unexecuted orders for the purpose of preparing appropriate bills and back office works. As per the margin paid to the MSEFSL and margins repaid by them we maintain a proper ledger account regularly”.
It is seen that direct entering of the trades in to the system will provide the necessary information and back up. This has been an industry practice and hence may not be viewed seriously. 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.
(b) Failed to collect margins from the clients and does not furnish the auditors certificates on quarterly basis to MSEFSL
It was mentioned in the inspection report that the sub-broker has not ensured the maintenance of minimum margins by the clients and had not furnished the requisite auditors certificate on quarterly basis during the period covered under inspection.
The sub-broker has submitted that they normally collect the total cost of transactions in advance from the clients or atleast on the same day / following day. The margins from clients were accounted mostly for the securities held with them as pay outs received earlier pending delivery or pending sale.
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) Failed to deliver securities or funds to the clients account within 48 hours of the pay out
As per the inspection report there are certain instances where the sub-broker has not passed on the delivery of securities and funds to the clients within the stipulated time.
The sub-broker has submitted that these clients mandated them to maintain a running account of funds and securities. There were no complaints from clients for non-payment of funds and securities.
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.
(d) Non-segregation of client funds from his own funds
As per the inspection report sub-broker is operating only one bank account for receipts and payments pertaining to both his own and the clients and even payments for administrative expenses are also being met out from that account.
The sub-broker submitted that they did not have any proprietary training. They maintain separate accounts for client transactions and for administrative purposes. They have produced copies of the ledger accounts.
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.
(e) Failure to meet margin obligations and delay in meeting pay in dues to the broker
As per the inspection report there were several occasions the sub-broker failed to pay the margins and pay in dues to the broker within the due dates.
The sub-broker submitted that in certain instances since they have not received clearance from the banks against high value cheques their payment to the exchange was delayed. The delay mainly occurred in the initial periods during 2002 and 2003. For the delay they have paid penal interest to the broker. Such instances are not happening now.
I have considered the submissions and circumstances prevailed and is inclined to take lenient view.
(f) Dealing with clients who in turn act as sub-broker without registration
As per the inspection report two entities Trisun Investments and Magnum Consultancy dealt with them who in turn dealt on behalf of the clients and the sub-broker could not categorically state that these entities do not deal with them in the capacity as a sub-broker.
The sub-broker submitted that both the above entities were their SEBI registered sub-brokers to the Madras Stock Exchange and for the transaction executed on BSE these entities were acting on as their clients. They have further submitted that when they started trading on BOLT these entities requested them to treat as clients and had not renewed their SEBI registration. Few occasions at their instance delivery has been made to other parties in the initial period.
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.
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.10,000/- (Rupees Ten Thousand only) on the sub-broker. The sub-broker shall pay this amount of penalty of Rs10,000/- 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