IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.112/2003
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Date of Hearing
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09.12.2004
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Date of Decision
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13.12.2004
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In the matter of:
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Intec Shares & Stock Brokers Ltd.,
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Appellant – Represented by
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Mr. Rajiv Narula, Advocate
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Versus
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Chairman, Securities & Exchange Board of India
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Respondent – Represented by
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Ms. Deepa Kuruvilla, Advocate
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
N.L. Lakhanpal, Member
Per: Dr. B. Samal, Member
1. Appeal is taken up for disposal with consent of both parties.
2. The appeal is against the impugned order dated 25th August, 2003 of the Respondent. In exercise of the powers conferred upon the Chairman by virtue of sub section 3 of section 4 of the Securities and Exchange Board of India act, 1992 read with Regulation 13(4) and 13(6) of the SEBI (Procedure for Holding Inquiry by Inquiry officer and imposing penalties) Regulations, 2002, the respondent has ordered that the certificate of registration No. INB 230877337 of M/s. Intec Shares & Stock Brokers Limited a member of the National Stock Exchange of India Limited be suspended for a period of four months. The said order was to come into force on expiry of three weeks from the date of the said order. This Tribunal vide its Interim Order dated 15th September, 2003 stayed the operation of the said order by eight weeks. Subsequently this Tribunal on expiry of the said eight weeks vide its order dated 6th November, 2003 advised the parties to the appeal to maintain "status quo" as prevailed in the matter on the said date until further orders.
3. The brief facts of the case are as under:
4. The Respondent had ordered an inspection of books of accounts and other records of the appellant which was carried out by M/s. J. P. Kapur & Uberai, Chartered Accountants during 2000-01. The Appellant is a member of the NSE and was granted membership of the exchange on 12th March, 1996. The main promoters are Mr. Sanjeev Goel, Mrs. Ritika Goel, Mr. Rajeev Goel Mr. Pradeep Garg and Mr. Vinay Mittal and their associates. The above named are also the main directors of the broker company. The broker has wide base of clients ranging from individuals to sub brokers. The broker has taken 14 user – IDs from NSE for trading. The broker is not trading on its behalf except for certain disputed transactions . the broker is taking in its account and later square them off.
5. During the said inspection, certain irregularities were observed. The appellant received copy of the inspection report from the Respondent by letter dated May 5, 2001. The appellant filed a reply to the Inspection Report of the Respondent vide their letter dated September 8, 2001. Subsequently the appellant received a notice under regulation 28(2) of SEBI (Stock Brokers and Sub brokers) Regulations, 1992 vide letter No.A&E/16726/2002 dated August 28, 2002 from the Adjudicating & Enquiry Officer intimating the irregularities that were noticed in the report of M/s. J. P. Kapur & Uberai, Chartered Accountants on the inspection conducted on behalf of the respondent for the period April 1999 to March 2001. The appellant replied to the said letter vide its letter dated September 28, 2002. The appellant’s representative appeared before the Adjudicating & Enquiry Officer on 17th October, 2002. The Adjudicating & Enquiry Officer vide its letter dated October 25, 2002 issued a supplementary notice to the appellant. The appellant vide its letters dated October 11, 2002 and November 2, 2002 submitted additional replies to Adjudicating & Enquiry Officer. A personal hearing was granted on October 17, 2002.
6. The appellant submitted that NSE vide its letter dated February 12, 2003 enclosed show cause notice dated February 7, 2003 along with a copy of the enquiry report dated December 20, 2002 of Adjudicating & Enquiry Officer and show cause notice by SEBI calling upon the appellant to explain as to why the penalty as recommended by the Adjudicating & Enquiry Officer (suspension of certificate of registration for a period of four months) should not be imposed. The appellant vide its letter dated 14th March, 2003 replied to the show cause notice.
7. The Respondent during inspections conducted through M/s. J. P. Kapur & Uberai, Chartered Accountants in 2001 found prima facie that the appellant committed several violations which are as follows:
(i) Delay in making payments to clients.
(ii) Contract notes did not bear pre printed serial numbers and acknowledgement by client on the duplicate copy.
(iii) Client registration form and Agreement not maintained.
(iv)Indulged in off market transactions and cross deals.
(v) Margins not collected.
(vi)Delay in making delivery of securities to clients.
(vii)Non segregation of clients’ funds and own funds.
(viii) No time stamping of orders.
(ix)Made cash transactions with clients instead of cheque transactions.
8. Heard both parties. The position with respect to each of the above irregularities are as under:
(i) Delay in making payments to clients.
The appellant has confirmed that there has been delay of one or two days. They have also confirmed that the payments are now being made as per rules.
(ii) Contract notes did not bear pre printed serial numbers and acknowledgement by client on the duplicate copy.
The contract notes are not serially numbered on daily basis due to software limitations which has since been rectified and running number is given now. The contract notes are sent by courier and clients do not personally collect the contract notes copies of the courier slips are maintained.
(iii) Client registration form and Agreement not maintained.
The appellant confirmed the deficiencies in the client registration form and stated that they have since been rectified. Regarding list of clients having no data base it was submitted by the appellant that the data base was available and auditors were supposed to have come back 3 days after the inspection to pursue the same. Since they could not come it was not shown to them. They had undertaken to file copies of the data base of the active clients as per list at Annexure D to the Show Cause Notice.
(iv)Indulged in off market transactions and cross deals.
The appellant has admitted that there has been error in reporting client to client transaction to the Exchange. They have now stopped doing any client to client transactions.
(v) Margins not collected.
The appellant has submitted that margins were collected from clients but were collected from the clients’ account instead of the margin account. The margins are now being credited to the margins account and the appellant submitted an auditors certificate on a quarterly basis to the Exchange.
(vi)Delay in making delivery of securities to clients.
The appellant has clarified that they have the necessary mandate from the clients to retain the securities from time to time. They have submitted copies of letters given by their respective clients to retain securities.
(vii)Non segregation of clients’ funds and own funds.
The appellant clarified that in the instances where the client account was used for withdrawal of cash the money was received as ICDs and deposited in Cash/Cheque in its account because of immediate transfer of margin money to NSE and withdrawn later in cash/cheque for facilitating the repayment of ICDs in order to avoid delay. Some of the other transactions have been inadvertently carried out and appellant has now streamlined their banking activities and there are no instances of payment from the bank account of client for business activities thereof. The appellant has assured the Respondent that the same will not be repeated.
(viii) No time stamping of orders.
The appellant has stated that the order time and trading time are appearing in the contract notes issued to clients and the same have not been disputed by their clients till date. They have further submitted that it is practically difficult to have the same recorded in the live market and most of the orders are placed on the telephone and it is not possible to have the time of order recorded physically and put the order in the terminal. The appellant is working in a computerized environment and the computer terminal record the time of the order and the same are not disputed by their clients. The said order is converted into a trading and trading time and date recorded which appear on the contract notes issued to the clients.
(ix)Made cash transactions with clients instead of cheque transactions.
The appellant has clarified that only payments from clients were received in cash and no payments in cash has been made from their side. The appellant further confirmed that the same are within the prescribed limits of Income-tax rules and the receipts for the same have been issued by them. The amount so received have been reflected in the bank statements from time to time.
9. The counsel for the Respondent submitted that the appellant has committed serious irregularities which are established during the inspections. The learned counsel for the respondent submitted that for smooth functioning of the security market it is essential that the appellant must adhere to the conditions as stipulated in the relevant Act. Taking into the gravity of violations committed by the appellant, the Enquiry Officer recommended suspension of certificate of registration of the appellant for a period of four months. The respondent is right in imposing the penalty of suspension of certificate which he has the authority. It is further submitted that even though the Enquiry Officer did not mention Regulation 13(6) of SEBI (Procedure for holding enquiry by enquiry officer and imposing penalties), Regulations 2002, the findings as given by the enquiry officer warrant suspension of certificate of registration of the appellant for a period of four months.
10. We have carefully considered the facts and circumstances of the case. SEBI (Procedure for holding enquiry by enquiry officer and imposing penalties), Regulations 2002, have divided the penalty into major and minor penalties. Warning is one of the minor penalties. The regulations itself contemplates such a penalty. Undoubtedly the appellant has a good track record and deserves a lenient punishment that meets the ends of justice. Therefore, we feel that every opportunity should be given to the broker to rehabilitate himself. Accordingly the order of the respondent and charges of suspension of certificate of registration for a period of 4 months is modified to that of a warning.
11. The impugned order stands modified to this extent. The appeal is disposed of accordingly.
No order as to costs.
Sd/-
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Justice Kumar Rajaratnam
Presiding Officer
Sd/- Sd/-
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N.L. Lakhanpal
Member
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Dr. B. Samal
Member
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Place: Mumbai
Date: 16/12/2004
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