ORDER OF ADJUDICATING OFFICER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF M/s. SHARAVU SECURITIES 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. Sharavu Securities Pvt. Ltd., sub-broker holding SEBI Registration Number INS230725736, affiliated to BGSE Financial Ltd., member of National Stock Exchange of India Ltd. (NSE), (hereinafter referred to as “M/s. Sharavu Securities 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 15F (a), 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 6, 2004 in which the sub-broker submitted a detailed reply.
4. PERSONAL HEARING
The personal hearing in the matter was granted on June 17, 2004. Shri Ramchandra, CEO and Shri N. M. Girish, Director of the Sharavu Securities 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) Irregularities in maintenance and issuance of contract notes
As per the inspection report contract notes are issued in Form A instead of Form B. Contract notes are numbered on daily basis and not on annual basis. Time of placing order is not printed on the contract note. Broker stamps are not affixed on the original contract note from April 2003.
The sub-broker has submitted that the irregularities pointed out by the inspectors have been rectified and that they are taking all precautions to comply with the requirements.
This explanation of the sub-broker does not appear to be satisfactory in view of the fact that contract note is the prime document establishing the prime contractual relationship between the client and the broker. However I have considered the fact that the sub-broker has already taken corrective steps.
(b) Non collection of margin money from clients
It was mentioned in the inspection report that margin money not collected by the sub-broker as per circular number SMDRP/POLICY/CIR-33/2000 dated 27/7/2000. The sub-broker is dealing with clients with continuous debit balances, collection of part pay-in instead of full and aiding and abetting in evasion of margins by treating the other sub-broker of subsidiary as clients and executing trades for them.
The sub-broker has submitted that generally they collect the full consideration on the following day of the transactions and therefore in certain cases they have not collected the margins separately from the clients. Certain clients had requested them to give time to pay the debit in their account for which they have authorised them to keep the shares till the debits in their accounts are cleared. They have carried out certain transactions on behalf of the sub-broker of BGSE Financials Ltd. Mostly this was done to avoid auctioning of shares and hence to avoid further losses to the clients on their account. They have further submitted that all such client accounts are presently closed and no transaction is carried out during the financial year 2003-2004.
The explanation given by the sub-broker for entering dealings on behalf of the sub-brokers of BGSE Financial Ltd. is not acceptable and therefore and liable for penalty. However, I have considered the steps taken by them from repeating the violation
(c) Inadequacy in maintaining client database
As per the inspection report separate client registration forms for individual and non-individuals are not obtained and there were discrepancies observed in taking cross references.
The sub-broker has submitted that “as regards client database we have only one corporate client and obtained all required documents for the registration. In all other cases we are maintaining the client database properly”.
The omission of the sub-broker is more of technical and procedural in nature and that the sub-broker has taken corrective steps.
(d) Non-maintenance of books of accounts and records
As per the inspection report sub-broker is not maintaining order book.
The sub-broker submitted that “by and large we take order over phone and punch directly into the system and maintenance of order book is not felt necessary”.
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) Non segregation of own funds from clients funds
As per the inspection report the non-segregation of funds is not in compliance with SEBI circular dated 18/11/1993.
The sub-broker submitted that they have large clientele and due to the delay and difficulties in clearing of cheques both local and outstation received from the clients sometimes they have to resort to the working capital put in by the company. They further submitted that they maintain separate accounts for client’s transaction and for their own expenditure accounts. The instances cited are rare and few.
I find the discrepancies more on account of practical difficulties and a lenient view is taken.
(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 many of their clients authorise them to retain their funds and securities received on pay out for the future transactions as a matter of convenience. There were no deliberate delays on their part in payment of funds or delivery of securities.
I find no complaints against the sub-broker in this regard and the discrepancies observed were of procedural in nature.
(g) Non-maintenance of unique client code
As per the inspection report the client code is alpha numeric four digit code. In certain cases one client has more than one code.
The sub-broker submitted that they had allotted two codes only to two of their clients on their request to distinguish between their deliver basis transaction and trading transaction due to the limitation of the back office software which was in use at that time.
The reply of the member cannot be accepted because by adopting different codes for same clients in different segments the concept of unique client code is lost. The act of the member is therefore violation of the rules and regulations and liable for imposition of penalty.
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.20,000/- (Rupees Twenty Thousand only) on the sub-broker. The sub-broker shall pay this amount of penalty of Rs.20,000/- 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