Order against M/s Singhal Securities

Feb 06, 2008

Orders : Orders of AO

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO.VSS/AO- 01/2008]

UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995

In respect of

M/s. Singhal Securities

(PAN : AARFS1438F)

FACTS OF THE CASE IN BRIEF

1. M/s Singhal Securities (hereinafter referred to as the ‘Noticee’) is a partnership firm having Smt. Pooja Aggarwal w/o Shri Vijay Kumar Aggarwal and Smt. Vibha Agarwal w/o Shri Lalit Kumar Aggarwal as the two partners. The Noticee was registered as a sub-broker with Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) during the period from January 03, 2001 to March 18, 2005. The Noticee was affiliated to Marck Securities Pvt. Ltd., (hereinafter referred to as ‘Marck’) Member, National Stock Exchange (hereinafter referred to as ‘NSE’). The SEBI registration number of the Noticee was INS230873619 and its office was situated at Opp. Laxmi Talkies, Gular Road, Aligarh, Uttar Pradesh, Pin Code - 202 001.

2. On January 17-18, 2005, a team of officials from SEBI and NSE visited the office premises located at opposite Laxmi Talkies, Gular Road, Aligarh, Uttar Pradesh and inspected the of books of accounts and other records made available to them. The inspection team found that the V-sat terminal which was allotted to the Noticee earlier was being operated by Mr. Kunal Aggarwal from the same premises under a different user ID – 9423 (for Cash Market) and 3573 (for F&O segment). As per the records of SEBI and NSE, the Noticee was registered with SEBI as a sub-broker in the Capital Market segment during the period of inspection. The inspection team was informed by one Mr. Kunal Aggarwal that the Noticee had ceased to be a sub-broker of Marck with effect from February, 2004.

3. The inspection team conducted the inspection of the books of accounts and other records at the said premises covering the period from April, 2004 to February, 2005. The inspection team observed many shortcomings/ deficiencies in the functioning of Mr. Kunal Aggarwal and in maintenance of records, including, dealing with/as unregistered entity, punching wrong codes in the trading system while inputting trades, failure to maintain client registration forms and sub-broker-client agreements, dealing in cash with clients and operating trading terminals by persons other than approved users. Since Mr. Kunal Aggarwal was operating from the same premises that of the Noticee and issued trade confirmations to his clients in the name of the Noticee, the allegations were attributed to the Noticee.

APPOINTMENT OF ADJUDICATING OFFICER

4. Mr. Piyoosh Gupta was appointed as the Adjudicating Officer (‘AO’) vide order dated February 13, 2006 to inquire into and adjudge under section 15 I of the SEBI Act, 1992 read with SEBI (Procedure for Holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Adjudicating Rules”) the alleged violation of section 12 of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’), various provisions of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as ‘Brokers Regulations’) and certain Circulars by the Noticee.

5. Consequent upon the transfer of Mr. Piyoosh Gupta, the undersigned was appointed as the Adjudicating Officer vide order dated November 19, 2007.

SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING

6. A Show Cause Notice (‘SCN’) dated January 17, 2007 was issued to the Noticee under Rule 4 of Adjudicating Rules to show cause as to why an inquiry should not be held against the Noticee and penalty be not imposed on the Noticee under section 15HB of SEBI Act for the alleged violations specified in the said show cause notice. The following violations were alleged against the Noticee in the said SCN:

a. Dealing with/as unregistered entity in violation of Section 12 of SEBI Act, 1992, Rule 3 of SEBI (Stock Brokers and Sub Brokers) Rules, 1992, Regulation 26(xiv) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”), SEBI Circular No. SMD/Policy/Cir-3/98 dated January 16, 1998 and SEBI Circular Sub-brok/Cir/02/2001 dated January 15, 2001.

b. Wrong Punching of codes in the trading system while inputting the trades in violation of SEBI Circular No.SMDRP/Policy/CIR-39/2001 dated July 18, 2001, Clause A(1), A(2), and A(5) read with regulation 7 and Clause A(1), A(2) and D(1) read with regulation 15 of the code of conduct under Regulations and regulation 26(xx) of the Regulations.

c. Non-maintenance of client registration forms and sub-broker client agreements in violation of SEBI Circular No.SMD/POLICY/IECG/1-97 dated February 11, 1997, SMD/POLICY/Circulars/5-97 dated April 11, 1997, SMD/POLICY/CIRCULAR/11-97 dated May 21^st 1997 and regulation 26(xii) of the Regulations.

d. Dealings in cash with clients in violation of SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 and regulation 26(xx) of the Regulations.

e. Operating trading terminals by persons other than approved users in violation of SEBI Circular No. SMDRP/Policy/Cir-49/2001 dated October 22, 2001 and regulation 26(xix) of Regulations.

7. A copy of the inspection report and other documents were also forwarded to the Noticee along with the said show cause notice.

8. The Noticee vide letter dated February 06, 2007 sought four weeks’ time to submit its reply. Thereafter, the Noticee vide letter dated Nil (received on April 02, 2007) submitted the reply stating, inter-alia, the following:-

· We have stopped business activities since January 2004 onwards which is evident from the letter dated December 29, 2003 sent by Marck to us and our letter dated January 03, 2004 to them. Copy of these letters is enclosed.

· In Para 2 and Para 3 of the inspection report it has been acknowledged that we have ceased operations from February, 2004.

· The premises from where we had been working, i.e., Opp. Laxmi Talkies, Gular Road, Aligarh (U.P.), was rented premises and we have vacated it.

· Till the time we were working as a sub broker, i.e. January, 2004, we on our part had been following all the rules and regulations of SEBI.

· We deny the allegations of the violations of SEBI Rules and Regulations as observed on the date of inspection, as much prior to that date we had stopped the business activities and surrendered the terminals etc. to the main broker.

· We are not in a position to submit any reply regarding the irregularities, if any, found on January 17-18, 2005 because of lack of knowledge and the reply to the same can be given by the main broker only.

· No business activity can be carried without the consent and knowledge of the main broker.

· It is requested that proceedings against us be dropped.

9. A notice dated July 03, 2007 was issued advising the Noticee to appear for a hearing on July 13, 2007 at 11.30 a.m. at SEBI Bhavan, Bandra Kurla Complex, Mumbai. M/s B. K. Barve & Co., Advocates and Legal Consultants, on behalf of the Noticee, requested for an adjournment in the matter, vide letter dated July 13, 2007. Thereafter, another opportunity of hearing was granted on September 04, 2007 vide notice dated August 24, 2007. M/s B. K. Barve & Co. appeared on behalf of the Noticee and made written submissions. They also requested for another hearing in the matter at a later date. The written submissions made during the hearing include the following:-

· We were working as a sub broker of Marck in capital market segment under valid SEBI Registration.

· We have stopped our entire business activities since January, 2004. Marck vide their letter dated December 29, 2003 had instructed us to stop the trading as a sub broker on their behalf and in response thereto we vide our reply dated January 03, 2004 had confirmed that we have stopped business activities and necessary documents were forwarded to Marck. The letters are self explanatory and prove the fact that we had stopped our activities as a sub broker since January 03, 2004.

· Mr. Kunal Aggarwal, who was found at the subject premises is in no way concerned with us. He had intimated the inspection team that M/s. Singhal Securities has ceased to be a sub broker of Marck from February, 2004.

· We were carrying on business from a rented premises which has been vacated and handed over to the landlord since January, 2004.

· We acted as a sub broker till January 2004 and have followed all the rules and regulations of SEBI. The inspection report itself makes it clear that we are in no way concerned with the allegations made in the notice as we have not violated any Rules and Regulations of SEBI on the date of Inspection.

· We have stopped the business activities and surrendered the terminals as well as all the relevant documents to the main broker. Hence, we are unable to give explanations to the alleged irregularities found by the Inspection Team on January 17-18, 2005. The said allegations relates to main broker only because no business activity can be carried out without the consent and knowledge of the main broker and V-sat can be operated only through main broker.

· Mr. Kunal Aggarwal was doing business by using his own code which cannot attract penal provisions for us. We are in no way concerned with alleged sample of 29 trades executed on May 13, 2004 and June 11, 2004 by Mr. Kunal Aggarwal by using his own client code and issuing alleged trade confirmation. We have not authorized Mr. Kunal Aggarwal to do such illegal activities.

· We have not violated the provisions of section 12 of SEBI Act or various SEBI Rules and Regulations or SEBI Circulars. Since we have stopped functioning as a sub broker hence the question of maintenance of Client Registration Forms and client sub-broker agreements does not arise. No such irregularities were either committed and/or applicable or attracted to us after January 03, 2004 hence, the question of due compliance is unwarranted. Further, we have not sponsored or caused to sponsor any person to act on our behalf. We have not employed any person in this regard.

· We have not dealt with any client either directly or indirectly and either in cash or any negotiable instrument.

· We have not committed any irregularity and/or violation in working as a sub-broker and therefore, we are not liable for any penalty.

· The allegations in the Show Cause Notice are not maintainable in law as well as on facts and therefore the enquiry against us may be dropped.

10. As desired by the Noticee, another opportunity of hearing was granted on January 25, 2008 vide notice dated December 28, 2007 and the Noticee was advised to submit documentary evidence, if any, regarding vacation and handing over of the rented office premises and to explain as to how the back office software of the Noticee was used by Mr. Kunal Aggarwal without the Noticee’s authorization/consent/ connivance.

11. M/s B. K. Barve & Co. appeared on behalf of the Noticee on January 25, 2008 and reiterated the written submissions made on September 04, 2007. In addition, an affidavit in support of the Noticee’s claim that they had vacated the rented office premises situated at Opp. Laxmi Talkies, Gular Road, Aligarh and handed over the possession of the said premises to the Landlord in January 2004. A copy of the possession letter dated January 06, 2004 signed by the Noticee and the Landlord confirming the handing over of the said premises to the Landlord was also submitted. During the said hearing, the Noticee was advised to furnish details regarding constitution of the noticee, the name of the partner/s or the proprietor (as the case may be), the copy of Permanent Account Number (PAN) card, etc. M/s B. K. Barve & Co. vide letter dated January 31, 2008 has clarified that the notice is a Partnership Firm having Smt. Pooja Aggarwal and Smt. Vibha Aggarwal as the two partners and in support of this, a copy of the Deed of Partnership dated June 3, 2000 was enclosed. A copy of the PAN card of the firm as well as the partners was also submitted.

CONSIDERATION OF ISSUES AND FINDINGS

12. I have noted that the joint inspection team of SEBI and NSE conducted inspection of the premises on January 17-18, 2005 where the Noticee was carrying on his sub-broking business, i.e., Opp. Laxmi Talkies, Gular Road, Aligarh, Uttar Pradesh, prior to February 2004. I have noted the observation of the inspection team that they were informed by one Mr. Kunal Aggarwal that the Noticee had ceased to be a sub-broker of Marck with effect from February 2004. The inspection team inspected the books of accounts and the records made available to them by Mr. Kunal Aggarwal for the period covering April, 2004 to February, 2005. The inspection team observed certain shortcomings/deficiencies and they were attributed to the Noticee and consequently, the allegations were made against the Noticee.

13. I have noted the submissions of the Noticee that they had stopped their entire business activities since January, 2004 and in support of their submission, the Noticee has forwarded a copy of the letter of Marck dated December 29, 2003 and their reply to Marck dated January 03, 2004. It is observed from the aforesaid letter of Marck that Marck instructed the Noticee to stop the trading as a sub-broker on behalf of Marck with effect from February 01, 2004. Marck also advised the Noticee to comply with the requirement for the cancellation of registration and send the original registration certificate immediately and settle the account. The Noticee in their aforesaid reply dated January 03, 2004 informed Marck that after receiving the aforesaid letter of Marck, they have stopped business activities and requested Marck to take necessary steps in order to collect the V-sat and other equipments allotted to them.

14. I have noted that in response to the letter dated July 05, 2005 of SEBI to Marck forwarding a copy of the inspection report, Marck vide letter dated August 10, 2005 has replied stating, inter-alia, that the Noticee was doing business at Opp. Laxmi Talkies, Gular Road, Aligarh, Uttar Pradesh till January 31, 2004 and the operations of the Noticee were ceased since February 01, 2004 vide Marck’s letter dated December 29, 2003. Marck has also stated that a public notice stating that the Noticee is not engaged with it as sub-broker since February 01, 2004 and application for the cancellation of the registration is being forwarded to SEBI/NSE, was published in the newspaper ‘The Statesman’ dated January 13, 2005. A copy of the said public notice was forwarded by Marck to SEBI along with its aforesaid letter. Marck has also stated in the aforesaid letter that “Thereafter from the said location Mr. Kunal Agarwal who was the approved user of Capital & F&O Segment started to operate the terminals and after due compliances two Unique Client Code under Capital & F&O Segment (AK1 & AKF1) were allotted to him from Marck Securities Pvt. Ltd. He worked with Marck Securities Pvt. Ltd. as an investor (client), in his individual capacity at this branch. A photocopy of the account opening form along with the risk disclosure document and requisite agreement between Marck and Mr. Kunal Aggarwal was forwarded by Marck to SEBI along with its aforesaid letter

15. I have also noted the submissions of the Noticee that they have vacated the rented premises at Opp. Laxmi Talkies, Gular Road, Aligarh, Uttar Pradesh and surrendered the vacant possession of the same to the Landlord. I have perused the documents submitted by the Noticee on January 25, 2008 including the affidavit of Mrs.Vibha Agarwal dated January 21, 2008 stating, inter-alia that the physical and vacant possession of the premises was handed over by the Noticee to the landlord in January 2004 and the Possession Letter dated January 06, 2004 signed by the Noticee and the Landlord confirming the handing over of the said premises to the Landlord.

16. I have also noted that the Noticee had surrendered its registration on March 18, 2005 and the surrender of registration was accepted by SEBI on June 06, 2006, with effect from March 18, 2005.

17. I have also noted the preliminary observations of the inspection team that the Noticee ceased to be a sub-broker of Marck with effect from February 2004 and the same V-sat allotted to the Noticee was operated by Mr. Kunal Aggarwal from the same premises under a different user ID (9423) and that Mr. Kunal Aggarwal is a client of Marck in cash segment with Code No. AK1 and in F&O segment with AKF1.

18. I have also noted the observation of the inspection team in the final inspection report that “Even though if M/s Singhal Securities is assumed to have ceased its operations since February 2004, technically the operations run by Shri Kunal Aggarwal from the above location would be deemed as a branch of Marck Securities and any observations in this inspection report would mutatis mutandis apply to Marck Securities as well”.

19. In view of the foregoing, I am of the view that the short comings/deficiencies observed by the joint inspection team upon inspection of the books of accounts and records made available to them by Mr. Kunal Aggarwal at the premises at Opp. Laxmi Talkies, Gular Road, Aligarh, Uttar Pradesh cannot be attributed to the Noticee. Therefore, the consequent alleged violations of the provisions of the SEBI Act, Broker Regulations and the Circulars as specified in the SCN dated January 17, 2007 do not stand established.

ORDER

20. In view of my findings mentioned hereinabove, I am of the view that this case does not warrant imposition of monetary penalty and the matter is, accordingly, disposed of.

21. In terms of Rule 6 of the Adjudication Rules, copies of this order are sent to the Noticee and also to the Securities and Exchange Board of India.

DATE: FEBRUARY 06, 2008	V S SUNDARESAN
PLACE: MUMBAI	ADJUDICATING OFFICER