ORDER OF ADJUDICATING OFFICER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF M/s. VISALAM SHARES 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 Visalam Shares Pvt. Ltd., sub-broker holding SEBI Registration Number INS010723331, affiliated to MSE Financial Services Ltd., member of The Stock Exchange, Mumbai (BSE), (hereinafter referred to as “M/s Visalam Shares 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), 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 16, 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 28, 2004. Shri M. Meyappan, Director, of the Visalam Shares 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) Acting as unregistered sub-broker
As per the inspection report the sub-broker is in turn dealing with NSE member M/s. Cholamandalam Securities Ltd. in the capacity as sub-broker in NSE segment without valid registration from SEBI.
The sub-broker submitted “we are mainly doing proprietary business and clientele business for our family members i.e. 30 to 40 clients in all. Prior to becoming sub-broker to MSEFSL, since there was no trading in MSE we have been dealing with M/s. Cholamandalam Securities Ltd. member of NSE for our investment transactions. Once we became sub-broker of MSEFSL the transactions through NSE decreased and completely stopped after the SEBI inspection”.
The explanation given by the sub-broker is not acceptable, however I considered the submission of the sub-broker that it was done during the interim period before becoming sub broke of MSFSL and that the trading was minimal most for proprietary and family members, while considering the penalty.
(b) Non-maintenance of minimum margin by clients
It was mentioned in the inspection report that the sub-broker was not maintaining either cash or scrip balances for the clients to the extent of atleast 10% of their net outstanding position on a given day. They had not furnished the requisite auditors certificate on quarterly basis during the period covered under inspection to the sub-broker.
The sub-broker has submitted that their clients do not maintain an open position and they have mandated letters from their clients for utilising their share and cash positions against margin if necessary. It is felt that the sub-broker should have furnished the records and evidences at the time of inspection itself.
(c) Non-reporting of off the floor transactions
As per the inspection report the sub-broker by virtue of being a member in Madras Stock Exchange had not reported any of the transactions done outside the floor of the exchange, to the exchange on a daily basis i.e. the transaction executed by him through M/s. Cholamandalam Securities Ltd.
The sub-broker has submitted that these were transactions executed on the proprietary account and have now stopped all dealings with them.
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-maintenance of books of accounts and records
As per the inspection report sub-broker does not maintain order book and margin deposit book.
The sub-broker submitted that “we receive orders over phone and the same are put into the system directly for execution and therefore no separate order book is maintained”. The sub-broker further submitted that they have a very few clients consisting mainly of family member and a few friends. All positions are closed on the same day or delivery taken and paid for margin was not collected. A order book is now being maintained.
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.
(e) Non segregation of own funds from clients funds
As per the inspection report the sub-broker has not segregated the client’s funds from his own funds and operated only a common bank account for both clients and self.
The sub-broker submitted that a separate bank account is now being maintained. Majority of their transactions are on proprietary accounts and the company has put in substantial amount for investments and the client’s funds were very limited. It cannot be construed that they were using client’s funds for firm expenses as they have liquid own funds of over Rs. 20 lakhs in the business. The explanation given by the sub-broker for non compliance of stipulation is not acceptable.
(f) Delay in payments / delivery to clients
As per the inspection report, there has been delay in delivery of funds and securities to certain clients.
The sub-broker submitted that their clients were maintaining running account with them for funds and securities and on occasions they are mandated to keep the funds and securities as margins for transactions.
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.
(g) Indulging in indirect funding activities
As per the inspection report the sub-broker dealt with clients having continuous debit balance as also had indulged in money lending and borrowing activity and charging money for the same.
The sub-broker submitted that “we have on few occasions allowed our clients to trade inspite of them having debit balance with us in view of their long standing relationship with us. As far as lending of money this was a one of transaction which is now over and closed. In future such transactions will not be done, however, please note it was undertaken to earn additional revenue with surplus funds when market conditions were very dull with no opportunities”.
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.
(h) Delay / non-payment of margin and pay in dues to the broker
As per the inspection report there was delay in payment of margins and pay in dues on few occasions to the broker.
The sub-broker submitted that there has never been a non-payment. The delay for amount involving of Rs. 1 lakh or more was only on three times over three years. They submitted that they will be monitoring the position more closely in future.
Keeping in view of the records and documents submitted before the undersigned a lenient view is taken.
(i) Failure to pay turnover fees to SEBI
As per the inspection report the M/s Visalam Shares Pvt. Ltd has not paid the SEBI turnover fees as a member of the Madras Stock Exchange for the years 2001-02 and 2002-03.
The sub-broker submitted that by oversight the SEBI turnover fees as a broker of MSE have not been paid. They have since paid their SEBI turnover fees.
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.15,000/- (Rupees fifteen Thousand only) on the sub-broker. The sub-broker 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 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