Adjudication order in respect of Vidhyut B. Shah – Member ASE under Section 15 I of the SEBI Act read with Rule 5 of SEBI (Procedure for Holding Inquiry by Adjudicating Officer) Rules, 1995.
Whereas Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of Vidhyut B Shah, Member – ASE (hereinafter referred to as Member), and pursuant to this appointed me as adjudicating officer vide order dated January 7, 2004 under Rule 3 of SEBI (Procedure for holding inquiry by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to inquire into and adjudge under section 15 A (a) of the SEBI Act, as mentioned in the order no. MIRSD/ADJ/49/03-04 dated March 8, 2004 communicating the said appointment.
NOTICE :-
Pursuant to this a notice dated July 27, 2004 under Rule 4 (1) of the said rules was issued to member communicating the detailed charges leveled against them. Alongwith the said notice the member was given a copy of the inspection report.
REPLY :-
Reply to the aforesaid notice was received vide letter dated August 8, 2004 of the member, in which the member submitted his reply.
PERSONAL HEARING
The personal hearing in the matter was fixed on September 30, 2004 vide notice dated September 13, 2004. In reply to the notice the member sent a letter dated September 30, 2004 informing that he has nothing more to say to the said notice.
In response to the notice dated July 27, 2004 member vide reply dated August 8, 2004 submitted various objections on technical ground without giving any explanation to the violation observed by the inspection team.
Preliminary objections and findings :-
It is alleged by the member that no prior intimation of inspection, as required u/Reg.20 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, was given. I find the said objection to be baseless and it is observed that a notice of Inspection dated 30.10.2002 was in fact given to the member by the dealing deptt. of the Board. I also find that for the purpose of period of inspection the cut off date was taken as 11/11/2002 and not the one mentioned i.e. 11/12/03 by the member. The member has further raised few other objections without going into the merits of the case, and I do not find them tenable at all.
In view of the above, I now deal with the submissions made by the member before the inspection team for the purpose of this adjudication.
THE REPLY OF THE MEMBER VIS A VIS THE VIOLATIONS OBSERVED AS PER INSPECTION REPORT AND THE FINDINGS.
1) CHARGE – Contract notes
a) Time of transaction is not shown on the contract note.
b) Stamps not affixed on the original contract notes issued to clients.
c) Acknowledgment of contract notes not available
d) Are not serially pre-printed and the numbers are generated by the computer on a daily basis.
e) The signatures on the contract notes are not the authorized signatory
f) Non charging of brokerage on some trades.
REPLY OF THE MEMBER
a) The software which we were using did not provide the features but now we have got it rectified and the contract notes display the required details.
b) We had affixed the stamps on the original contract notes and therefore they could not be shown to the inspection team.
c) The clients have duly acknowledged the contract notes by signing on the duplicate of the contract notes. The copies of such notes are enclosed with the reply.
d) The member has not given any explanation.
e) The authority to a person other than the broker is submitted to the exchange. Copy of the registration document is enclosed.
f) No brokerage is charged on the trades executed by Mr. Ketan Shah and Mr. Samir Shah who are family members and are also assisting in the business. No investor interest is affected and no violation is done.
FINDINGS
I observe that generation of serial numbers on contract notes through computer on daily basis is a practice generally followed. Other violations mentioned are of technical in nature and member has also taken corrective steps and therefore penalty is not levied for the above observation.
2. CHARGE – Database of clients
No member – client agreements entered into.
REPLY OF THE MEMBER
Agreements with the clients were duly entered into. At the time of the inspection the record was not traceable to be shown to the inspection authority. The records has since been traced and photocopies of some agreements are enclosed with the reply.
FINDINGS
It is observed during inspection that member failed to produce client agreement for verification, however, he filed copies of four agreements after the inspection. The said agreements were not on stamp paper and it can be inferred that these were arranged post inspection. I find that the member has violated SEBI circular no. SMD/Polcy/Cir/5-97 dated 11/4/97. The said act on the part of the member invites penalty to be levied in terms of Sec.15 B of SEBI Act.
3. CHARGE – Payment/ Delivery to clients
i. Payout of the relevant settlements not made within 48 hrs, both money and securities. In some instances payments are due for more than 1 year.
ii. Exclusive segregation of clients funds and own funds not maintained and there is only one bank account through which all the payments and receipts are passed.
REPLY OF THE MEMBER
i. Some times the clients / sub brokers request us to retain the payment due to them against the debits of the subsequent settlements or towards margin for future purchases.
ii. We are having different accounts for our own funds and for clients funds. All the expenses and drawings have been made out of own account.
FINDINGS
It is observed that in some cases payments to clients were delayed for over a period of one year which is quite substantial and that too without having prior written consent. The member has however filed post dated consent of such investors which may be treated as ratification of oral commitments. This however should not be allowed in the interest of investors and the member needs to be cautious in this regard. The adjudication penalty is however not imposed for the said observation.
4. CHARGE – Dealings with sub brokers
i. Dealing as an un registered sub broker. The member is a registered sub broker of BSE (Broker is ASE Capital Markets Ltd. ) but prior to the registration he was dealing on BSE and NSE on behalf of the clients as un – registered sub broker.
ii. Dealings with un registered sub brokers – in case of Mahalaxmi Investment and R. G. Co. who are supposedly clients, the delivery of shares taken/ delivered are from a different person and not the clients.
REPLY OF THE MEMBER
i. SEBI (Stock Brokers and Sub Brokers) Rules, 1992 specify sub broker as a person not being the member of any stock exchange. In view of this, the member could not get himself registered as a sub broker with SEBI.
ii Mahalaxmi Investments have given a letter stating that they have not transacted any business except their own. The transfer of securities from different accounts belonging to their family members cannot be construed as transaction as sub broker. R. G. Co have not transacted at all on ASE through us. All the transactions are in respect of trades on BSE, which is outside the scope on this inspection.
FINDINGS
It is observed that the member is not having any registered sub broker. However the member is a registered sub – broker of BSE having SEBI registration number INS010949910/01-11074 dated 23/2/2001 having its main broker ASE Capital Markets Ltd. Before the date of registration as sub broker, the member was dealing on BSE and NSE on behalf of their clients as unregistered sub broker. The modus operandi of such dealings was that the member dealing with the other members of the Stock Exchange in the capacity of clients and in turn issuing the bills to his clients adding brokerage to the said transactions. The details of the broker through whom the member was trading on other exchanges are as under (details supplied by the member).
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Name of the Exchange
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Name and Registration No. of main broker
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NSE
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Shah Investors Home Ltd.
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INB-230759031 Code No. 7590
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NSE
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Naman Securities & Finance Pvt. Ltd.
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INB 230808238
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BSE
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Bright Star Securities Pvt. Ltd.
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No registration no. was found on the Contract note as well as the bill. On inquiry the same was made available. Bright Star is sub broker of Naman Securities & Finance Pvt. Ltd.
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BSE
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Doshi Sharebroking P. Ltd.
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Sub Broker Regn. No. INS 100832231/01-00070. Main broker is Deepak G Cholera.
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As per SEBI circular No. SMD/Policy/Cir/3-98 dated January 16, 1998 r/w Sec 12 of SEBI Act, 1992, it is necessary for any person who acts as sub –broker to hold Certificate of Registration as a sub broker granted by SEBI and accordingly the members of Stock Exchanges who also act as sub brokers should hold a separate registration with SEBI as a sub broker. He should have taken cognizance of the circular and should have applied for registration.
The fact that Mahalaxmi Investments has transferred the shares of different persons for delivery or pay in establishes that it was acting as sub broker. The family members ought to enter into agreements separately with the member to transact on their own.
The member has therefore violated the provisions of Rule 3 of SEBI (Stock Broker and Sub Brokers) Rules, 1992 and Sec. 12 of SEBI Act, 1992. The said conduct on the part of the member attracts penalty in terms of Section 15HB of SEBI Act.
In view of the above it is observed that the member has violated provisions of circulars dated 11.4.97 requiring the member to execute client forms and the agreements and circular no. SMD/Policy/Cir/3-98 dated 16.1.98 r.w. Sec. 12 of SEBI Act. The violations in this regard attracts the penalty as prescribed under section 15 B and 15HB of the SEBI Act and in order to adjudge the quantum of penalty, I have to consider the following factors :
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 member. 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. However, for the default with respect to not entering into the agreement with several clients by the member, I consider that the monetary penalty needs to be imposed on the member as a corrective measure. The adjudication penalty also needs to be imposed for member’s dealing as un-registered Sub broker and also with un-registered sub-broker, since this type of activity is against the interest of investors.
ORDER
The submissions of the member have been considered and dealt in detail as above and in view of the findings arrived at, I consider it to be a fit case for imposition of penalty under sections 15 B and 15HB of the SEBI Act, 1992. In view of the same and in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the said Rules, I hereby impose a penalty of Rs.1,00,000 (Rupees One Lakh Only) on the member. The member shall pay this amount of penalty of Rs. 1,00,000/- 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 of SEBI, MIRS Department (DPS- I) at SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005
Date : December 29, 2004.
Place : Mumbai
AMIT PRADHAN
ADJUDICATING OFFICER