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. SAURASHTRA CAPITAL SERVICES PVT LTD., (INB010748038) A MEMBER OF THE STOCK EXCHANGE, MUMBAI.
1. BACKGROUND
M/S. Saurashtra Capital Services Pvt Ltd., (hereafter referred as “broker”) is a member of the Stock Exchange, Mumbai (here after referred as “the BSE”) and National Stock Exchange (here after referred as “NSE”). An inspection of the books of accounts, documents and other records maintained by the broker during the period April 01, 2001 to March 31, 2003 was conducted during the month of May 2003, by M/s Shankarlal Jain and Associates, 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 indicated in the inspection report, and pursuant to the broker’s reply the Whole Time Member, Shri T. M. Nagarajan, in exercise of the powers conferred upon him under Section19 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 inquire into and adjudge the alleged violations committed by the broker as given below:
a) Failed to reconcile and pass on the dividends to clients in violation of 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”).
b) Failed to issue contract notes for jobbing transactions in the form and manner prescribed in the violation of section 15 F(a) of the act read with Regulation 26(v), 26(xv) and 26 (xvi) of the Regulations .
c) Failed to collect upfront margins in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
d) Did not obtain certificate of collection of margins by the sub-brokers in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
e) Failed to obtain/ maintain client registration forms in violation of Section 15HB of the Act read with Regulation 26(xii), 26(xv), 26(xvi) of the Regulations.
f) Kept the securities belonging to clients in members pool account thereby failed to deliver securities to clients within the stipulated period in violation of Section 15F(b) of the act read with Regulation 26(vi) and 26(xv) of the Regulations.
g) Did not adhere to the regulation/ guidelines regarding unique client code in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulation.
h) Dealt with unregistered sub-brokers and remisiers in violation of Section 15HB of the Act read with Regulation 26(xiv) and 26(xv) of the Regulations.
i) Granted trading terminals at unauthorised locations in violation of Section 15HB of the Act read with Regulation 26(xix) of the Regulations.
j) Failed to comply with directions issued by the board in violation of section 15 HB of the act read with regulation 26 (xv) of the Regulations.
k) Have 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 dated September 17, 2004 was issued by the undersigned to the broker asking him to show cause as to why penalty under the provisions of the Act read with Rule 5 of SEBI (Procedure for holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 should not be imposed upon him in view of the alleged violations. The broker submitted his reply to the show cause notice vide his letter dated November 8, 2004. An opportunity of personal hearing before the undersigned was given to the broker on November 25, 2004. The Managing director of the broking entity Shri. Mukesh Doshi and Director of the broking entity Shri. Chandrakant Tanna appeared for the personal hearing, on November 25, 2004. The broker, during the personal hearing made his contentions with respect to the findings of inspection report and the alleged violations of SEBI Regulations / Rules / Guild-lines. The broker’s submissions below include his written reply as well as submission during the personal hearing.
4. REPLIES, FINDINGS AND RECOMMENDATIONS
4.1 The inspection division identified the following remaining areas of the inspection findings for possible regulatory violations:
4.1.1 Failed to reconcile and pass on the dividends to clients in violation of Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “Act”) read with Regulation 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”).
4.1.1.1. From the inspection report it is seen that the broker treated dividend on shares received on behalf of clients relating to earlier years as income of the member instead of crediting to Clients’ A/c. The total amount comes to Rs.75026.
In the written reply to SEBI Show Cause Notice, the broker stated that those shares were received from different clients at various points of time over the last few years because of which they could not make out as to for which client’s shares the dividend relates to.
The broker stated during the personal hearing that the said amount was credited to their dividend account because they used to receive the shares from sub-broker’s client’s accounts. The settlement period was over a week and in between if the shares are ex-dividend they used to receive the credit of dividend. Also they had received excess shares from some sub-brokers clients and had returned it to them. In between if the company declares dividend, it was also taken to their account. The dividends so received are in a low value basis and the number of such receipts is also very high. At the end of the succeeding financial year, they have transferred this amount to the broker’s income account. The broker also added that they are ready to transfer these dividends whenever a claim in this regard arises.
However in the clarifications in this regard as submitted by the broker on vide letter dated 29th November 2004, the broker has categorically stated that the un-paid dividend is Rs.75025.67/-.
4.1.1.2. From the observations contained in the inspection report and the subsequent submissions from the broker, I find that details of clients pertaining to these dividends are not ascertainable as number of receipts of such dividends are stated to be numerous and of small value and that too received over a very long period. Further the member submitted that as and when the clients claim, he was making the payment to the clients.
In this regard I do not find any violations by the member and at the same time the member may ensure to maintain a proper record of such dividend receipts in a suspense account and ensure to remit to the respective clients without treating it as his income.
4.1.2 Failed to issue contract notes for jobbing transactions in the form and manner prescribed in the violation of section 15 F(a) of the act read with Regulation 26(v), 26(xv) and 26 (xvi) of the Regulations.
4.1.2.1 It is alleged in the inspection report that the broker failed to issue contract notes for the jobbing transactions.
4.1.2.2 The member in his reply to the SEBI Show Cause Notice stated that the jobbing transactions are their own transactions and carried out by jobbers in their own account. The broker shares the profit/ loss with those jobbers in the agreed ratio for such transactions. In view of the fact that the transactions are done in their own account the broker does not issue contract notes on the said transactions, and issue the Report no.45 to the respective jobbers. Since the contracting parties are one and the same, they do not feel it mandatory to issue contract notes to such transactions.
4.1.2.3 In this regard I find that SEBI is of the view that contract notes need not be issued for broker’s own account transactions as the contracting parties are the same and accordingly, I accept the replies of the broker.
4.1.3 Failed to collect upfront margins in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
4.1.3.1. The inspection report has pointed out that the broker has not collected up front margin of 10% from the non-institutional clients.
Inspection report also states that the sub-broker’s collection of upfront margin is not on record. The certificate/ declaration for collection of up front margin by the 35 sub-brokers were not available.
4.1.3.2. The broker submitted that since they are maintaining running account with their clients, they do not insist for collection of up-front margins from them.
The broker stated during the hearing that there was only one instance of non-collection of Certificate of collection of up-front margin from sub-broker clients when that system was introduced. This was only for a single quarter. The broker further stated that they had admitted the same to the exchange and were levied penalty of Rs.5000/- by the exchange. After that this was rectified immediately.
4.1.3.3. After examining the inspection report and the replies from the broker I find that and the BSE had previously fined the broker in this regard and further the broker does not comply with the collection of upfront margin from the non-institutional clients. This I find that the broker has violated the SEBI circular SMDRP/Policy/Cir-33/2000 dated July 27, 2000 and SMD/Policy/Cir-12/2002 dated May 17, 2002. By not implementing the BSE directives in totality he has also violated clause A(5) of the code of conduct for Stock brokers specified under Regulation 7 of SEBI (Stock brokers & Sub Brokers) Regulations 1992.
4.1.4 Failed to obtain/ maintain client registration forms in violation of Section 15HB of the Act read with Regulation 26(xii), 26(xv), 26(xvi) of the Regulations.
4.1.4.1. The inspection report points out that in five instances PAN number or their documentary evidence were not on record.
4.1.4.2. The broker in his reply to the department has stated that they are enclosing documentary evidence with respect to two clients; however these documentary evidences were not received by the department. In their reply to the Show Cause Notice dated November 11, 2004 the broker stated that they have documents pertaining to three of the said clients and the remaining two clients had very few transactions with the broker and had stopped dealing with the broker, so the documents could not be obtained from them.
4.1.4.3 After taking into account the inspection report and subsequent replies from the broker. I find that in five instances the KYC was incomplete and considering the fact that no documentary evidence was produced by the broker supporting his claims, I agree to the department’s view that the broker has violated SEBI circular SMD/Policy/Cir/5-97 dated April 11, 1997.
4.1.5 Kept the securities belonging to clients in member’s pool account thereby failed to deliver securities to clients within the stipulated period in violation of Section 15F(b) of the act read with Regulation 26(vi) and 26(xv) of the Regulations.
4.1.5.1 It is alleged in the inspection report that the broker had kept the securities belonging to clients in member’s pool account thereby failed to deliver securities to clients within the stipulated period. It was seen that the details of demat accounts of those clients were not available on record.
4.1.5.2 The broker made his Submission that, authority letters from those clients were produced before the chattered accountants. They have further stated that they are enclosing such letters along with the reply to Show Cause Notice (Item no.8, Letter dated November 8, 2004). However such letters never reached SEBI. Further in their reply to the inspection department the broker had earlier stated that they had stopped trading with those clients, who do not have a demat account.
4.1.5.3. The replies from the broker appear to be contradictory. If the initial reply from the broker was correct and factual, the instance of obtaining authorization letters would not have arisen. Also such letters mentioned in the reply to Show Cause Notice dated November 8, 2004 has never reached SEBI and appears to be an effort to mislead the adjudication proceedings. In view of the above, I feel that the broker has committed the violation of SEBI Circular No. SMDRP/Policy/Cir-5/2001 dated February 01, 2001.
4.1.6 Not adhered to the unique client code in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulation.
4.1.6.1. The inspection report observed that the broker had allotted multiple IDs to six clients.
4.1.6.2. The broker in his submission to the adjudicating authority stated that among the six instances reported, five persons namely Vinod Patel, Shailesh Majumdar, Rajiv Storewala, Hitesh B Shah and Vipul B Shah are jobbers and each were allotted two codes, one for squiring up and the other for transferring the open positions. This was done by the software (Comtech single entry jobbing) automatically. And Himanshu Thakkar used to trade on his own behalf and on his company’s behalf. So to simplify the account two codes were allotted.
4.1.6.3 On analyzing the inspection report and the replies from the broker I do not find a need to have a separate ID for transferring open positions. So the broker has violated the unique client code requirements. Further it is seen that this practice has not been given up till now. I agree with the view of the inspection department that the practice of the broker would defeat the basic purpose behind the introduction of the unique client code. The broker has violated SEBI Circular No. SMDRP/Policy/Cir-39/2001 dated July 18, 2001.
4.1.7. Dealt on behalf of unregistered sub-brokers and remisiers in violation of Section 15HB of the Act read with Regulation 26(xiv) and 26(xv) of the Regulations.
4.1.7.1 The inspection report has pointed out that the member has been dealing with 4 unregistered sub brokers. Further it observed that the broker has 22 remisiers who were not recognized by the exchange nor approved by the governing board of the exchange.
4.1.7.2 The broker has stated that one of the unregistered sub-broker as pointed out in the inspection report M/s Sreya Investment Ltd got registered in as a sub-broker on 14th August 2002, though started dealing through the broker from August 1 2002. The broker stated that the transactions during the period when they were not registered were their own transactions.
Regarding Venus Stock Securities, the broker stated that they are not their sub-brokers nor authorized to deal as their sub-broker. Venus securities is registered with them only as their constituent.
Regarding M/s. Florescent securities ltd and M/s Ninja Securities Pvt Ltd , the broker stated that they were registered with them as clients. The broker got them registered as a sub broker once the BSE pointed out that they were acting as sub broker.
The broker vide his letter dated November 29, 2004 stated that the said remisiers are the directors, share holders and clients of the broker. The broker undertook to get registration for them at the earliest as remisiers.
4.1.7.3 From the examination of the inspection report and replies of the broker although the broker claimed that Venus Securities were not acting as sub-broker, he had not produced any documentary evidence to support his claim. Other two members were registered only after BSE pointed out to the member. In view of the above, I find that the broker had failed to comply with the clause A(5) of code of conduct for Stock brokers read with Regulation 7 of SEBI (Stock brokers & Sub Brokers) Regulations 1992. With respect to the unregistered remisiers, the broker have violated the provisions of SEBI circular No. SMD/Policy/Cir/3-97 dated March 31, 1997.
4.1.8. Granted trading terminals at unauthorised locations.
4.1.8.1. The inspection report alleges that the broker has provided two trading terminals to the clients at unauthorized locations.
4.1.8.2. In the reply to the inspection division the broker had stated that the two trading terminals were provided to the clients as a facility to serve them better and curtail cost of communication, for a temporary period only. In the reply to the Show Cause Notice he further added that he had deployed his own staff to operate those terminals. During the hearing, however the broker stated that the said terminals were granted with the permission of BSE. He agreed to submit a copy of the letter granting permission by BSE by 29th November 2004. However, the same was not produced.
4.1.8.3. On November 29, 2004 the broker submitted a copy of the application letter it had filed to BSE in order to get the terminals sanctioned. However it failed to produce the letter from BSE sanctioning those terminals. Hence I agree to the observation of inspection department that the broker has violated provisions of SEBI circular no. SMDRP/Policy/Cir-49/2001 dated October 22, 2001.
5. CONCLUSION- ORDER
The violations as mentioned as mentioned in the Show Cause Notice pertain to the years 2001-2003, while the referred regulations for adjudications are under Regulation 26 (v) (vi) (xii) (xiv) (xv) and (xvi) (xix) 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.
In the light of the above, after considering the non applicability of the Regulation 26 (v) (vi) (xii) (xiv) (xv) and (xvi) (xix) 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. 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 02, 2004