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ORDER
(Under Rule 5(1) of SEBI (Procedure For Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 read with Sections 15 I and 15 H B of the Securities and Exchange Board of India Act, 1992 in case of Shri Venugopal Malani, having SEBI Registration No.INB060140810 registered as a broker of Hyderabad Stock Exchange and Registration No.INS231067815 registered as a sub-broker affiliated to HSE Securities Ltd., (INB231103038) member of the National Stock Exchange of India Ltd (NSE).
1.0. APPOINTMENT AS ADJUDICATING OFFICER
1.1. The undersigned has been appointed as the Adjudicating Officer by the Securities and Exchange Board of India (hereinafter referred to as `SEBI’) in terms of an order dated October 18, 2004 to inquire into and adjudge under Sections 15H B of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “said Act”) the alleged contraventions of:
a. Violation of Rule 3 of Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Rules 1992 [hereinafter referred to as "the Stock Broker Rules"] read with Section 12 of the said Act and in terms of Regulation 26 (xiv) of the Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Regulations, 1992 [hereinafter referred to as "the Stock Broker Regulations"].
b. Non-compliance with SEBI Circular No.SMDRP/Policy/Cir-39/2001 dated 18.7.2001 read with Regulation 26(xv) of the Stock Broker Regulations, and
c. Non-compliance with the SEBI Circular No.SMD/SED/0072/92 dated 31.12.1992 read with Regulation 26(xv) of the Stock Broker Regulations.
by Shri Venugopal Malani, having SEBI Registration No.INB060140810 registered as a broker of Hyderabad Stock Exchange and Registration No.INS231067815 registered as a sub-broker affiliated to HSE Securities Ltd., (INB231103038) member of the National Stock Exchange of India Ltd (NSE) (hereinafter referred to as "the member").
2.0 Before I proceed to deal with the case, it would be pertinent to make a reference to the relevant portion of the provisions of Law/said Regulations.
2.1. Rule 3 of the said Stock Broker Rules: No stock-broker or sub-broker shall buy, sell, deal in securities, unless he holds a certificate granted by the Board under the regulations:
Provided that such person may continue to buy, sell or deal in securities if he has made an application for such registration till the disposal of such application.
Section 12 of the said Act: No stock-broker, sub-broker, ……………. who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration from the Board in accordance with the Regulations made under this Act…."
2.2. SEBI Circular No.SMDRP/Policy/CIR-39/2001 dated July 18, 2001: "………it will be mandatory for all brokers to use unique client codes for all clients…….Brokers shall also be required to furnish the above particulars of their clients to the stock exchanges/clearing corporations and the same would be updated every quarter (since modified as "monthly" with effect from……..)"
2.3. SEBI Circular No.SMD/SED/0072/92 dated December 31, 1992 requires strict adherence by the members of stock exchanges to the time schedule fixed by the Ministry of Finance for submission of Audited Reports of the members vide the Circular No.F.1/5/SE/83 dated 31.5.1994 issued by the Government of India, Ministry of Finance, Dept of Economic Affairs, Stock Exchange Division, and further stipulates that the members should submit the audit report which should be in the prescribed format, within 30 days of the its receipt to the concerned Stock Exchange.
2.4. Violation or non-compliance with provisions of SEBI Act, Rules, Regulations/Circulars as stated above at Para 2.1 above is liable for action under Regulation 26 (xiv) and, Para 2.2 & 2.3 above are liable for action under Regulation 26 (xv) of the said Stock Broker Regulations read with Section 15 H B of the said Act, which reads as under:
Regulation 26 of the said Stock Broker Regulations:
"A stock broker or a sub-broker shall be liable for monetary penalty in respect of the following violations, namely -
i)…..
ii)………
……..
xiv) Acting as unregistered sub-broker or dealing with unregistered sub-brokers.
xv) Failure to comply with directions issued by the Board under the Act or the regulations framed thereunder.
……."
Section 15 H B of the said Act:
Penalty for contravention where no separate penalty has been provided:
Whoever fails to comply with any provisions of the Act, the rules or the regulations made or directions issued by the Board hereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
3.0. FACTS OF THE CASE
3.1. At the instance of SEBI, NSE carried out a limited purpose inspection to ascertain whether Shri Venu Gopal Malani was involved in unauthorised trading activities. On the basis of the report submitted by NSE, SEBI has found that the member has committed the following violations liable for action under Regulation 26 of the said Stock Brokers Regulations, and punishable with penalty under Section 15 H B of the said Act , and appointed the undersigned as the Adjudicating Officer for the purpose:
· The member has acted as unregistered sub-broker through B N Rathi Securities in violation of Section 12 of the said Act read with Rule 3 the said Stock Brokers Rules.
· The member has placed orders on behalf of his clients under a single code, in violation of Unique Client Code requirements as laid down in SEBI Circular No.SMDRP/Policy/CIR-39/2001dated 18.07.2001 referred to above in Para 2.2.
· The member has not submitted Audit Reports to the Hyderabad Stock Exchange, thereby violating SEBI Circular No.SMD/SED/0072/92 dated 31.12.1992 referred to above in Para 2.3.
4.0 SHOW-CAUSE NOTICE AND REPLY OF THE NOTICEE
4.1. After being so appointed as the Adjudicating Officer, as per the procedure laid down in SEBI (Procedure for holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “SEBI Rules”), a notice in accordance with Rule 4 of the SEBI Rules was served to the member vide letter No SRO/Adj/EIF/2002/1/4334 dated November 2, 2004 through the Hyderabad Stock Exchange. The said notice provided the details of the provisions of Law and the violations alleged to have been committed by them also calling upon the member to explain why penalty for the abovesaid violations as prescribed in Section 15 HB of the said Act should not be imposed on the member.
4.2. Vide his letter dated 16th November 2004, the member made the following submissions:
4.2.1. Acting as sub-broker:
"I am basically working with M/s.B N Rathi Securities Ltd., as a client and have done business through M/s.B N Rathi Securities for my relatives and a few of my friends. I have not done any transaction for any outsider who is not known to me. I further submit that I have never caused any loss to any of the investors though they are my own relatives and friends for whom I dealt with. I respectfully submit that an application for sub-broker registration has been made to SEBI through the member M/s.B N Rathi Securities vide letter 25.6.2002 together with "No Objection" obtained from HSE dt.25.6.2002. A sum of Rs.1000/- has been paid to SEBI vide demand draft No.622970 dated 24.6.2002, a copy of which is enclosed for your kind reference".
4.2.2. Unique Client Code:
"Since I have done the business for me as well as for my family members and friends, I have not quoted the Client Code. I request SEBI to pardon me for this lapse".
4.2.3. Submission of Annual Accounts to the Exchange:
"I respectfully submit that Annual Accounts for the financial year i.e., 2002-03 will be submitted to the Exchange on 16.11.2004".
5.0. PERSONAL HEARING
5.1. After having considered his reply, an opportunity of personal hearing was granted to the member and on the date of hearing i.e., 8th December, 2004, the member appeared for the personal hearing, and made submissions as under:
Ø "I admit to have committed the violations. However, I have filed Audit Reports for the year ended 2002-03 on 16.11.2004. I will be filing the Audit Report for the year 2003-04 by 10th of December 2004, under confirmation to you. Further, I submit that I have not done any substantial volumes and in this connection I agree to furnish full details of trading done by me through B N Rathi Securities Ltd., by 17th December 2004, so as to enable you to take a view".
Ø "I request you to pardon me and not impose any penalty".
5.2. The member has also furnished certain additional information vide his letter dated 11.12.2004.
6.0 FINDINGS:
I have carefully considered the material on record, facts and circumstances of the case, written and oral submissions of the member.
6.1. Acting as unregistered sub-broker - Violation of Rule 3 of the said Stock Broker Rules read with Section 12 of the said Act
6.1.1. It is stated that Shri Venugopal Malani had taken a CTCL terminal in the name of Umesh Malani from B N Rathi Securities, Member NSE and had done client business in Cash Market and F&O segment without getting himself registered as a sub-broker of B N Rathi Securities Ltd. He was placing the orders under one code using the CTCL terminal and subsequently confirmations were given to his clients. In this way, he was acting as an unregistered Intermediary in these segments.
6.1.2. It is also noted from the material on record that the member has:
· received and made payments to various clients,
· issued confirmation memos and Statement of Accounts to the clients
6.1.3. Further, the member has admitted that he has done business through B N Rathi Securities for his relatives and friends. The volume of business so done by the member for his clients during the last 2 years, as also reflected by the copies of audited reports produced before me, is as under:
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Year
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Purchases
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Sales
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Total
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(Rupees In Crores)
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2002-03
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4.77
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4.79
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9.56
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2003-04
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178.95
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178.97
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357.92
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6.1.4. Thus, there is no dispute about the fact that the member has traded on behalf of various clients as sub-broker to B N Rathi Securities. It is however noted that he is a SEBI registered stock broker affiliated to the Hyderabad Stock Exchange, and also SEBI registered sub-broker affiliated to HSE Securities Ltd., but does not hold any separate sub-broker registration to act as sub-broker affiliated to BN Rathi Securities Ltd. It may be stated here that a registered sub-broker can transact business only through the member-broker to whom he is affiliated and such registration does not entitle him to do business with other brokers without separate sub-broker registration in each case.
6.1.5. Mere submission of application to SEBI for registration as sub-broker to B N Rathi Securities Ltd., will not fetch him any legal sanction to act as a sub-broker unless and until a certificate of registration is issued by SEBI for that purpose, and the contention of the member in that regard is not tenable.
I therefore hold him guilty of violating Rule 3 of the said Stock Broker Rules read with Section 12 the said Act, liable for action in terms of Regulation 26 (xiv) of the said Stock Broker Regulations.
6.2. Non-compliance with the requirement of Unique Client Code - Non-compliance with SEBI Circular No.SMDRP/Policy/Cir-39/2001 dated 18.7.2001 read with Regulation 26(xv) of the Stock Broker Regulations:
6.2.1. SEBI Circular dated 18.7.2001 requires all stock brokers to use separate Client Code for all clients and also requires them to furnish/update information about their clients to the stock exchanges/clearing corporations on a monthly basis (with effect from 29.09.2003 - earlier on quarterly basis). Against this requirement, it is noted that the member has been placing orders received from different clients, both in Cash and F&O segment, under one code "UMM". The member has also admitted to have used single client code for all business done on behalf of various clients, through B N Rathi Securities, in violative of the aforesaid SEBI Circular.
I therefore hold him guilty of violating SEBI Directives regarding Unique Client Code requirements and liable for action in terms of Regulation 26 (xv) of the said Stock Broker Regulations.
6.3. Non-compliance with the SEBI Circular No.SMD/SED/0072/92 dated 31.12.1992 read with Regulation 26(xv) of the Stock Broker Regulations.
6.3.1. SEBI Circular dated 31.12.1992 read with Government of India, Ministry of Finance, Capital Market Division Circular No.F/1/5 prescribes that audit of the accounts of the members of the stock exchanges should be completed within 6 months from the closing of books and accounts and requires the members to submit audit report within 30 days to the stock exchanges. The said Circular also prescribes the format in which the Audit Report is to be submitted.
6.3.2. In this regard, the member, while admitting the delay, has stated, vide his letter dated 11.12.2004, that he has submitted audit reports for the last 2 years to the stock exchange, on the dates as mentioned below, and also submitted copies of acknowledgement of audit reports given by the stock exchange:
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Period
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Date of Audit Report
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Date of Filing with the Exchange
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Year ended 31st March 2003
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06.10.2003
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16.11.2004
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Year ended 31st March 2004
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06.10.2004
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09.12.2004
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While the delay on the part of the member with regard to submission of audit reports is evident from the above, it is also noted that the member had chosen not to file the audit report with the stock exchange until after the initiation of this adjudication proceedings.
6.3.3. It is also observed from the copies of the audit reports submitted by the member that the Audit Report is not in conformity with the format prescribed in the said Circular.
Therefore, I find that the member by his failure to submit the audit reports to the stock exchanges within the prescribed time limit and in the prescribed format, has violated the directives issued by SEBI.
7.0. PENALTY
7.1 The aforesaid said violations by the member attracts penalty under Regulation 26 (xiv) and (xv) of the said Stock Broker Regulations read with as prescribed under Section 15H B of the said Act which prescribes a penalty which may extend upto one crore rupees.
7.2. The question now arises as to what penalty should be imposed on the member in the light of the provisions of Section 15 H B of the said Act for the aforesaid violations. Before arriving at the quantum of punishment, besides the objective behind the aforesaid statutory requirements, factors as prescribed in SEBI Rules and in Section 15J of the said Act, Sub rule (2) of rule 5 of SEBI Rules, need to be taken into account. It may be stated here that various measures are taken by SEBI from time to time to protect the integrity and safety of the market and also to enhance the level of transparency, in the interest of investors, and the above referred provisions of the SEBI Act/Regulations/ Directives are also intended to serve the same purpose.
7.3. The member by acting as an unregistered sub-broker has not only defeated the objectives of Rules and Regulations but has also deprived the investors of the benefit of investor protection measures/redressal mechanisms which otherwise would have been available to the investors had the member acted as a registered sub-broker.
7.4. Further it is noted that the member is registered with SEBI as a stock broker affiliated to the Hyderabad Stock Exchange and as a sub-broker affiliated with HSE Securities Ltd. Instead of transacting his business through the medium of Hyderabad Stock Exchange/HSE Securities Ltd., wherein he holds valid registrations, he had willfully chosen to do business in an unauthorized manner, as explained above, thereby endangering the safety of the securities market. This fact would also go to establish his ulterior motives to keep himself outside the regulatory purview.
7.5. In addition, the member did not file audit reports within the prescribed time, though audits were completed long back. This Audit Report is meant to serve as an effective tool in the hands of the stock exchange in monitoring the financial soundness of the stock brokers, and also to take appropriate remedial action in the event of deficiencies, if any, noticed therein, in the overall interest of the market. The member by not filing the audit reports in time, had willfully kept himself outside the regulatory oversight and hampered the ability of the stock exchange to perform their functions in ensure market safety.
7.6. Also, the member by not complying with the requirement of Unique Client Code as prescribed in SEBI Circular referred to above, had concealed the identity of the ultimate investors and had curtailed the ability of the stock exchange/Regulators to monitor such trades through an effective audit trail.
7.7. It may be relevant to state here that margins and exposure limits, prescribed by SEBI as part of risk containment measures are determined based on the gross positions at clients level. The member, by not using separate client codes, had evaded payment of margins/additional capital requirements, as the usage of unique client code would have resulted in the member paying higher level of margin/additional capital. Thus, the member had defeated the risk containment measures and acted to the detriment of the securities market.
7.8 The member has also made a request for pardoning the lapse. It may be stated here that the cumulative effect of the violations committed by the member is that the member has acted against the transparent transaction requirement and prudent regulatory controls, thereby endangering safety and integrity of the securities market and the violations as explained above are not that trivial to be condoned.
7.9. Further, it is noted that the member has done huge volume of business which is of the order of Rs.358 Crore for the year 2003-04 (Para 5.3.2 above) which by no means can be ignored as insignificant. The Audited Balance Sheet as on 31st March 2004 shows the member's capital at just Rs.3.23 lakh. It may thus be said that the member has indulged himself in excessive trading volumes, beyond reasonable levels not commensurate with his financial soundness and that too without legal sanction. Thus he had exposed the securities market in general, and his clients in particular to a great risk.
7.10. In view of the seriousness of the violations and their implications as stated above, the member deserves to be punished in order to ensure that investors in the securities market do not get exposed to any further risk and consequential loss and that the safety and integrity of the market remains unimpaired.
7.11. It may be relevant to cite here the observations of the Hon’ble High Court of Mumbai in Appeal No.7/2001 in SEBI Appeal No.24/2000, the SEBI vs. Cabot International Capital Corporation. In the said case, the Hon’ble High Court had held that:
“There is no question of proof of any mens rea by the appellants and it is not essential element for imposing penalty under SEBI Act and the Regulations. The penalty imposable under the SEBI Act and the Regulations under Section 15 I and 15 J is deterrent in nature to see that the parties or person concerned complies with the Regulations strictly……."
7.12. Taking into account the above facts and circumstances of the case, the findings as recorded above, and taking into account the factors as contained in Section 15 J of the said Act, I am of the view that a penalty of Rs.2,00,000/- shall be just and proper for the aforesaid violations.
7.13. I hereby, impose a total penalty of Rs.2,00,000/- on the member for the aforesaid violations. Shri Venugopal Malani, having SEBI Registration No.INB060140810 registered as a broker of Hyderabad Stock Exchange and having Registration No.INS231067815 registered as a sub-broker affiliated to HSE Securities Ltd., (INB231103038) member of the National Stock Exchange of India Ltd (NSE) shall pay this amount of penalty of Rs.2,00,000/- (Rupees two lakh only) by way of Demand Draft drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai to be sent to Ms.Usha Narayanan, Chief General Manager, M I R & S Dept., SEBI, World Trade Center, Cuffe Parade, Mumbai - 400 005, immediately on receipt of this Order.
A SUNILKUMAR
ADJUDICATING OFFICER
DATE : 30.12.2004
PLACE : Chennai 600 018