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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. UNITED SHARE BROKERS LTD., (INB 230838032) BROKER OF NATIONAL STOCK EXCHANGE.
1. BACKGROUND
1.1 M/S. United Share Brokers Ltd., (hereafter referred as “broker”) is a member of the National Stock Exchange, Mumbai (here after referred as “the NSE”). An inspection of the books of accounts, documents and other records maintained by the broker during the period April 2001 to March 2003 was conducted during May 2003, through M/s Uberi Sood & Kapoor, 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 powers conferred upon him under Section 19 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 10, 2004, to enquire into and adjudge the alleged violations committed by the broker as given below:
( a ) Failed to issue contract notes in the form and manner prescribed in violation of Section 15 F(a) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "Act") read with Regulation 26(v) , 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the "Regulations").
( b ) Not maintained Order Book in violation of Section 15HB of the Act read with Regulation 26 (iii), 26 (xv) and 26 (xvi) of the Regulations;
( c ) Failed to maintain proper segregation of clients funds and own funds in violation of Section 15HB of the Act read with Regulation 26 (xiii) of the Regulations;
( d ) Transferred trade from proprietary account to client account (not exercising due care in punching client code and indulging in off the floor transactions) in violaltion of Section 15HB of the Act read with Regulation 26 (xv) and (xvi) of the Regulations;
( e ) Not framed code of internal procedures and conduct for prevention of insider trading in violation of Section 15HB of the Act read with Regulation 26 (xv) and 26 (xvi) of the Regulations;
( f ) 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;
( g ) 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 November 18, 2004 to the broker to show cause as to why penalty under the provisions of Chapter VI A of SEBI Act read with Regulation 26 of SEBI (Stock Brokers & Sub-brokers) regulation should not be imposed upon him in view of the alleged violations. An opportunity for personal hearing before the undersigned was given to the broker on December 7, 2004. The broker was advised to submit his reply if any while attending the personal hearing. The broker submitted his written reply to the show cause notice when he appeared for the personal hearing. The broker, during his personal hearing on December 7, 2004 explained his position with respect to the findings of inspection report and the alleged violations of SEBI Regulations / Rules / Guidelines. The broker’s submission below includes his written reply as well as submission during the personal hearing.
4. REPLIES AND FINDINGS
4.1 Failed to issue contract notes in the form and manner prescribed Section 15 F(a) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "Act") read with Regulation 26(v) , 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the "Regulations")
4.1a Contract notes are computer generated and serial number are generated on day to day basis instead of annual basis.
From September 02, 2002 this practice of generating serial nos. on day to day basis was stopped. Afterwards continuous pre-printed serial nos. are being used.
4.1b Copies of duplicate contract notes are not acknowledged by the clients.
In the specified cases the client is situated in Dehradun so the acknowledgement could not be obtained. However, the details of despatch are entered into the despatch register.
4.1c Settlement Nos. on the contract notes are not properly printed.
The member replied that they were using short-forms of settlement nos. in the contract note. However, they have started giving settlement no. properly and have rectified them.
It is seen that the broker has already rectified the errors in the form and manner of contract notes. The undersigned is of the opinion that there is no need for any punitive action as the error is already rectified.
4.2 Not maintained Order Book in violation of Section 15HB of the Act read with Regulation 26 (iii), 26 (xv) and 26 (xvi) of the Regulations;
The broker explained that it was not practical to maintain order book as the clients gave order verbally on telephone or were physically present in the trading terminals while placing orders. Orders from the clients are executed on verbal instructions and hence no order book is maintained.
It is seen that direct entering of the trades into the system will provide the necessary information and back up. This has been an industry practice and hence may not be viewed seriously.
4.3 Failed to maintain proper segregation of clients funds and own funds in violation of Section 15HB of the Act read with Regulation 26 (xiii) of the Regulations;
It is seen that the bank charges/exchange dues/other receipts were made through the client account which should have been routed through the business account. It is seen that expenses like lease rental, software development charges, furniture lease and exchange dues were paid directly from the client account.
The broker has submitted that since the monies were urgently payable to the exchange they had given instructions to the banker over telephone to effect the transfer immediately. Due to an oversight the bank directly paid from the client account instead of routing it through the business account of the broker. In the personal hearing conducted on December 07, 2004 the broker submitted that was the brokerage earned during the period was lying in the client account. He also admitted that in 8 instances cheques were issued from the client account for an amount aggregating to Rs.3,80,000/-. He stated that this was due to oversight and clerical error.
Further vide letter dated December 7, 2004 the broker submitted that the amounts in question regarding the security lease rent and Security furniture lease were in fact deposits (not withdrawals) wrongly made to the client account instead of Business account of the broker.
From the examination of the inspection report and the replies from the client it is seen that the broker had not ensured in the above instantces segregation of client funds and own funds. In doing so the broker has violated provisions of SEBI circular no.SMD/1/23341 dated November 18, 1993.
4.4 Transferred trade from proprietary account to client account (not exercising due care in punching client code and indulging in off the floor transactions) in violation of Section 15HB of the Act read with Regulation 26 (xv) and (xvi) of the Regulations.
In a total of 4 settlement period checked by the inspection team it was observed that there were 30 instances of trades being transferred from the proprietary account to the client account.
In the written reply to the initial show cause notice sent by the Department the broker replied that they have taken notice of the error. They also stated that they are ensuring that no trade will be transferred from the proprietary account to the client account in the current year or in the future.
During the personal hearing held on December 07, 2004 the broker admitted that the few instances that occurred was due to shortage of time/clerical errors while punching entries. In certain cases this was done to rectify the wrong codes punched while entering the transaction.
From the examination of the inspection report and the subsequent replies from the broker it is seen that certain transactions were done from proprietary account and was later transferred to the clients account. This helps the broker to avoid mentioning of unique client codes, payment of margins to the exchanges etc. Further there is a possibility that the profits arising out of such a trade can be retained with the broker stating that the trade could not be executed while the losses if any can be conveniently transferred to the clients. Thus the practice of the member is not in accordance with the code of conduct prescribed under Schedule II of SEBI (Stock Brokers & Sub Brokers) Regulations 1992, which inter alia, requires the broker to maintain high standards of integrity and fairness in all conducts of his business.
4.5 Not framed code of internal procedures and conduct for prevention of insider trading in violation of Section 15HB of the Act read with Regulation 26 (xv) and 26 (xvi) of the Regulations;
The broker in his reply to show cause notice dated 06.11.2004 stated that they do not come under the definition of insider given in the SEBI (Prohibition of Insider Trading) Regulations, 1992. They however ensured that if any person who purchases a reasonable quantity of shares they take written declaration from him wherever applicable.
It is seen from the replies from the broker that they have not adhered to the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992 which directs the intermediaries to adopt a code of conduct for prevention of insider trading as specified in Schedule II of SEBI (Prohibition of Insider Trading) Regulations, 1992.
5. CONCLUSION
The violations as mentioned in the Show Cause Notice pertain to the years 2001-2003, while the referred regulations for adjudications are under Regulation 26(iii), (v) (xiii), (xv) and (xvi) of Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Regulations, 1992 which were effective from November 20, 2003. Therefore the undersigned is of the opinion that the said Regulations are not applicable.
In the light of the above, after considering the non applicability of the Regulation 26(iii), (v) (xiii), (xv) and (xvi) of Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Regulations, 1992, the undersigned is of the view that penalties as mentioned in Section 15 HB of SEBI Act, 1992 are not leviable against the broker for the aforementioned alleged violations during the period. However in view of the violations as discussed above, the department may consider any other suitable action.
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 31, 2004.