| ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HODING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S. M.P. VORA SHARES & SECURITIES PRIVATE LIMITED, MEMBER, BSE FOR THE ALLEGED VIOLATON OF SECTION 15 OF SEBI ACT, 1992 READ WITH REGULATION 26 OF SEBI (STOCK BROKERS AND SUB-BROKERS) REGULATIONS, 1992. |
I was appointed as Adjudicating Officer by SEBI vide order dated 22nd March, 2004 to inquire into and adjudge the alleged contravention of Section 15A(c) of SEBI Act, 1992 read with Regulation 26(iii) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, Section 15F(a) of SEBI Act, 1992 read with Regulations 26(v), 26(xv) and 26(xvi) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, Section 15HB of SEBI Act, 1992 read with Regulations 26(xii), 26(xiii), 26(xiv), 26(xv), 26(xvi) and 26(xix) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 by M/S. M.P. Vora Shares & Securities Pvt. Ltd. (hereinafter referred to as the broker) in the matter of not maintaining the Register of Accounts of Sub Brokers, failing to issue Contract Notes for jobbing transactions in the form and manner prescribed, failing to obtain/ maintain client registration forms, failing to maintain proper segregation of clients’ funds and own funds, failing to collect margins, dealing with unregistered Sub Brokers and Remisiers, granting trading terminals at unauthorized locations, failing to comply with directions issued by the Board and not exercising due skill, care and diligence (as per the inspection report submitted by Parekh Shah & Lodha, Chartered Accountants who conducted inspection on behalf of SEBI) and matters incidental thereto. The period of inspection was 01.04.2001 to 31.03.2003.
Accordingly, a show cause notice dated June 10, 2004 was issued to the broker (along with a copy of the inspection report submitted by Parekh Shah & Lodha to SEBI). It was alleged that the broker has violated provisions of Regulation 26 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and Section 15 of SEBI Act, 1992. The broker replied to the show cause notice vide their letter dated June 21, 2004 and subsequently submitted their detailed reply vide their reply dated November 17, 2004. Subsequently, a personal hearing before me was given to the broker on November 24, 2004. The written reply given by the broker to the show cause notice and their submissions during personal hearing are discussed below.
ALLEGATIONS AGAINST THE BROKER, REPLIES GIVEN BY THE BROKER AND CONSIDERATION OF THE REPLY
1. It has been alleged that the broker did not maintain the Register of Sub Brokers.
The broker, in reply to this allegation has said that the discrepancy is rectified and the Register of Sub Brokers is being maintained by them.
Since the broker has rectified the discrepancy, a lenient view is taken.
2. It has been alleged that Contract Notes were not issued for jobbing transactions. Also, as per Rules, Own ID should be used for these transactions. However, it was observed that the broker has done jobbing transactions using Client ID instead of Own ID and did not issue contract notes.
In reply to this, the broker stated that earlier they were using Own ID for jobbing transactions but they started using Client ID after the Auditor of BSE asked them to use Client ID instead of Own ID. The broker stated that the Auditor orally told them to use Client ID and did not give any instructions in writing. The broker further stated that there is lot of confusion in the market regarding whether Own ID or Client ID should be used for jobbing transactions and whether contract notes should be issued or not for these transactions and even BSE is not giving clear information regarding this point. The broker stated that the confusion on jobbing transactions was caused due to lack of clear instructions from the exchange. The broker further stated that they would benefit by doing jobbing transactions on Own ID because for transactions done on Own ID, there is no need to pay service tax whereas for transactions done on Client ID, they have to pay service tax. The broker stated that they used Client ID for jobbing transactions and did not issue Contract Notes because of the confusion in the market regarding the same and lack of clear instructions from the exchange on the matter.
In this regard, SEBI is of the view that issuance of Contract Notes is not necessary in case of Own account transactions as both the contracting parties are the same. Further, I accept the broker’s explanation that they have used Client ID instead of Own ID for the jobbing transactions due to lack of clarity, but these transactions were essentially jobbing Own account transactions. In view of this, I do not find this as violation.
3. It was alleged that discrepancies were found in Know Your Client forms being maintained by the broker. The discrepancies were alleged to have occurred in 28 cases.
In reply to this, the broker stated that they faced an extortion threat by Dawood Gang and the gang has taken away about 32 to 40 cupboards of files, books of accounts, documents, agreements etc from the broker. The broker stated that necessary complaints against the gang have been filed in various police stations and cases are underway in various courts. The broker stated that a few documents relating to the clients were lost in this process and the broker has since collected the missing documents/ information. The broker has submitted copies of agreements with 27 clients and stated that the documents relating to one client i.e. UJWAL TRADING could not be found.
I accept the broker’s explanation that the discrepancies occurred due to the extortion threat faced by them. Also, the broker has taken steps to rectify the discrepancies in Know Your Client forms and hence, a lenient view is taken in this matter.
4. It was alleged that the broker did not segregate clients’ and own funds and effected transfers from the client account to own account and to the OD account of the broker which have been used to fulfill short term pay in obligations. Further, it was alleged that the broker was involved in fund lending/ borrowing activities to meet short term obligations.
In reply to this, the broker stated that they have paid Rs. 2,00,000/- to Mangal Keshav Share & Stock as deposit for NSE Terminal. However, they came to know that this is prohibited by SEBI Rules and immediately asked for the return of deposit amount. As far as payments to/ from other persons/ entities are concerned, the broker submitted that they have borrowed funds only from the family members. The broker stated that this was done in cases where they did not receive payments from clients in time due to various reasons. The broker stated that in such instances, they borrowed funds from the accounts of family members and recovered the dues from the clients later. Once dues are recoved from the clients, they repaid amounts due to the family members. The broker stated that they have separate client account and own account and that they never utilized clients’ funds.
As far as funds received from other entities are concerned, the broker stated that in two instances, they have received cheques from two entities and the cheques were cancelled on the same day and hence, they have not borrowed funds from these entities. Also, the broker stated that they received advances from two entities for purchase of shares and later these entities have not executed the orders and the advances have been returned to them. The broker stated that to be on the safe side, for certain high value transactions, they insist upon receiving amount for the entire value of the transaction in advance instead of just the margin amount. If these orders are not executed by the clients later, these advances will be returned to them. The broker stated that these are mere advances given by the clients for purchase of shares and not loans taken by the broker.
It appears that the broker used funds from family members to tide over short term obligations and repaid the amount due to them after receiving money from the clients and thus did not use clients’ funds. Also, the broker has taken loans only from family members to tide over short term payment obligations. As far as funds taken from other entities are concerned, they seem to be advances received for purchase of shares.
5. It was alleged that the broker regularly carried out jobbing transactions and the payment and receipt obligations in respect of these transactions were carried out through the client account instead of making the payments from own account.
In reply to this, the broker stated that they keep certain fixed amount and also funds generated by brokerage, jobbing profit and bad debt recovery in client account for the sake of using the funds for the margin requirements for jobbing transactions. The broker stated that they used these funds maintained in the client account for payments for jobbing transactions.
The broker seems to have maintained his funds (accrued brokerage etc.) in the client’s account for margin requirements for jobbing transactions and used these funds for jobbing transactions. Thus, the broker did not use clients’ funds for jobbing transactions even though the payments were made from the client account.
6. As per Rules, the broker should not be involved in any type of business other than the securities business. It was alleged that the broker extended credits without adequate security to enable securities trading by clients/ sub brokers in two cases.
In reply to this, the broker stated that they had disputes with the two parties relating to brokerage and bad delivery. The broker stated that the dispute with one of the parties (Rajat Shares & Stock Brokers) is settled and they have written off Rs. 5,98,740.97 as bad debts from the other party (V & U Security). The broker submitted copy of the ledger of V & U Security in proof of his claim.
After examining the ledger copy of V & U Security and considering the explanation given by the broker that they had brokerage problems with the two parties, I accept the explanation given by the broker.
7. It was alleged that the broker did not collect margins from the clients. 6 client names have been given from whom margins were not collected.
In reply to this, the broker stated that auditor has taken total of all the transactions during inspection period instead of calculating margins on the value of transactions outstanding at any point of time. The broker has submitted copies of ledgers of all the 6 clients’ accounts for which they are alleged with non collection of margins. For all these accounts, the broker stated that either the account had enough balance for margins at any point of time or they collected physical shares of companies (whose value is equivalent to margin amount to be collected) instead of cash.
As per Rules, the broker has to collect margin deposits not less than 10% of the net open position of a client at any point of time. These margins can be in the form of cash, bank guarantees, FDRs or approved securities. From the ledger accounts submitted by the broker, it is found that the broker had enough balances to cover for the margin requirements of individual clients. Also, where enough balances were not there, the broker submitted copies of documents (letters given by the clients) to show that they have taken shares of different companies for margin requirements. Hence, the broker’s explanation is accepted.
8. It was alleged that the broker dealt with unregistered Sub Brokers, unregistered Remisiers and granted two terminals to M/s. Rajat Shares & Stock Brokers whose application for registration was still pending with SEBI.
In reply to this, the broker stated that they were not properly aware of the SEBI Rules and Regulations in this regard and they enquired with officials of BSE on this matter. The broker stated that the BSE officials have stated that once entities make an application with SEBI for registration, the broker can start doing business with them. The broker stated that the entities named in the inspection report have later received registration from SEBI. Similarly, the broker stated that he granted terminals to M/s. Rajat Shares & Stock Brokers once they applied to SEBI for registration. The broker stated that all the entities who have registered as remisiers have sent their registration details to them except for Clio Finance. The broker stated that they do not have good relations with Clio Finance and have discontinued business with Clio Finance.
I find that these entities were registered subsequently as Sub Brokers and Remisiers. Thus, there were technical violations and the broker had violated the provisions of the following SEBI Circulars:
(i) Circular No. SMD/POLICY/CIRCULAR/ 11 -97 dated May 21st, 1997
(ii) Circular No. SUB-BROK/CIR/02/2001 dated January 15, 2001 and
(iii) Circular No. SMDRP/POLICY/CIR-49/2001 dated October 22, 2001.
CONCLUSION - ORDER
The violations as mentioned in the Show Cause Notice pertain to the period 01.04.2001 to 31.03.2003, while the referred Regulations for Adjudication are under Regulations 26 (iii), 26 (v), 26 (xii), 26 (xiii), 26 (xiv), 26 (xv), 26 (xvi) and 26 (xix) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 which were effective from November 20, 2003. Therefore, the undersigned is of the opinion that the said Regulations therefore are not applicable to the present case.
In the light of the above, after considering the non applicability of Regulations 26 (iii), 26 (v), 26 (xii), 26 (xiii), 26 (xiv), 26 (xv), 26 (xvi) and 26 (xix) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, the undersigned is of the view that penalties as mentioned in Rule 5 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 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.
Adjudicating Officer
December 2, 2004