BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.145/2003
In the matter of:
M/s. Ansh Portfolio Kendra Pvt. Ltd. Appellant
Vs.
Securities and Exchange Board of India Respondent
Present:
Shri Rajiv Narula
Advocate
Shri Ravikumar Varanasi
Advocate for Appellant
Shri Kumar Desai
Advocate
Ms. Daya Gupta
Advocate
Shri Sridhar Reddy
Legal Officer, SEBI for Respondent
ORDER
Ansh Portfolio Kendra Pvt. Ltd., is a corporate member of the Delhi Stock Exchange since December, 1997. The company acquired membership of the exchange through corporatisation of membership of a proprietary concern namely M/s. Aruna Gupta & Co. which acquired membership of the Exchange in April 1990. Shri Sunil Kumar Gupta, Shri Shankar Somani and Smt. Aruna Gupta are on the Board of the company. Smt. Aruna Gupta holds 44% while rest of the stake in the company is equally divided between Shri Sunil Kumar Gupta and Shri Shankar Somani. The latter two are also on the Board of M/s. S. S. Corporate Securities Ltd., which is a Member of NSE. The company has an annual turn over of more than Rs.1000 crore. The records of M/s. Ansh Port Folio Kendra Pvt. Ltd., for the period 1.4.2000 to 5.12.2000 were inspected by an inspection team of the Respondent on December 5 and December 6, 2000. The inspection team noticed some violations of the Securities contracts (Regulation) Rules, 1957, SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, SEBI (Stock Brokers & Sub Brokers) Rules, 1992 and some directives issued by SEBI from time to time as well as rules, regulations and bye-laws of the Delhi Stock Exchange. The Inspection Report was submitted to the Respondent SEBI which called for the Appellant’s explanation. Not being satisfied with the explanation submitted by the Appellant, the Respondent appointed an enquiry officer to conduct the enquiry as per the procedure prescribed under SEBI (Procedure for holding enquiry by enquiry officer and imposing penalty) Regulations, 2002. After receiving the report of the enquiry officer a show cause notice was issued to the Appellant and an order dated 12th November, 2003 was passed suspending the certificate of registration of the Appellant for a period of one month. Being aggrieved by the said order the Appellant has filed the present appeal.
The show cause notice based on the enquiry officer’s report alleged that the Appellant had committed the following violations.
- Irregularities in maintenance of books of accounts –
Document register or stock register maintained by the Appellant did not contain particulars (distinctive nos. etc.) of securities received and delivered by the company.
- Irregularities in issuance of Contract Notes as below:
- The serial numbers were not pre printed on the contract notes.
- Form A contract note was issued for principal to principal transactions instead of Form B.
- Off the floor transactions.
- Dealing with unregistered brokers.
- Delay in delivery of securities.
Regarding (a) above the allegation is that the document register being maintained by the Appellant for the physical shares did not contain particulars relating to distinctive numbers of shares and securities received and delivered by them. The Appellant stated in reply that the document register was being maintained in compliance with the regulation 17(1)(g) in respect of shares and securities received and delivered for Demat shares which constituted bulk of transactions and that in respect of physical securities also, which constituted an insignificant percentage of the transactions, the register was maintained but with the distinctive numbers records, although linked to the document register, being maintained separately. The Appellant also contended that this technical deviation from the prescribed procedure did not result into any compromise in terms of investor servicing or in its internal control mechanism. During the hearing of this appeal the learned Counsel for the Appellant submitted that the Respondent had ignored the fact that the concept of physical delivery had been stopped in the securities market and Demat accounts were to be maintained with the depository ; that the delivery of scrips had to be given in Demat mode and not through physical stock for the transactions in the Stock Exchange. He, therefore, submitted that the purpose of maintaining the stock register with distinctive numbers had become irrelevant as in the Demat shares there was no requirement for the distinctive numbers but only the quantity of stock that was lying in the Demat account which was reflected in the transaction statement issued by the depository participant with whom the Demat account was maintained. The learned Counsel further argued that regulation 17(1)(g) of SEBI (Stock Brokers and Sub Brokers) Regulations 1992 did not specifically require that the distinctive numbers must appear on the document register nor did the regulation prescribe any specific format for the document register. The learned Counsel was of the view that the Respondent had, therefore, erred in arriving at the decision that the Appellant had violated regulation 17(1)(g). As against this the learned Counsel for the Respondent argued that some of the smaller exchanges had still not gone completely electronic and that the document register with specific mention of the distinctive numbers of scrip was, therefore, of vital importance for protecting the interests of such shareholders. According to the learned Counsel for the Respondent the Appellant had also admitted that there were indeed some scrips with him in physical form although he claimed that he had been maintaining records of the same separately and that the Appellant therefore, compromised the interests of the investors.
In respect of (b) above the Appellant has been charged with the following omissions/irregularities in issuance of contract notes:
i. the serial numbers were not pre printed on the contract notes.
ii. Form A contract note was issued for principal to principal transactions instead of Form B.
With reference to (i)the Appellant had submitted that pre printing of serial numbers in the contract notes, would not serve the purpose since many a times transactions relating to a single client for a particular date might run into several pages ; that pre printing of serial number would generate multiplicity of serial numbers for a single contract note leaving little control with the broker ; that it was difficult for a broker to assess the number of contract notes that would be consumed in a particular period with any degree of accuracy. The Appellant also contended that the fact that the stock exchanges had been issuing guidelines for starting of number from time to time made the practice of pre printing of serial numbers a wasteful exercise. The Appellant had also contended that the contract notes used by him bore computer generated serial numbers which was as good as pre printing. The inspection team seemed to acknowledge the fact that the contract notes did indeed bear computer generated serial numbers but rejected this argument on the ground that these numbers would start from 1 every day thereby leaving open the possibility of insertion of contract notes at a later date. During the proceedings before the enquiry officer, the Appellant argued that this contention of the inspection team was not correct and that he had been using the contract notes bearing computer generated serial numbers starting from April 1, 2000 and that there was no possibility of insertion of contract notes at a later date. The enquiry officer interpreted this argument of the Appellant as an admission by him that the contract notes for the period preceding the year 1999-2000 were not bearing the pre printed serial numbers and, therefore, concluded that there was a violation of the provisions of SEBI Circular No.SMD/MDP/CIR/643/96 dated August 5, 1996.
Regarding (ii) above the inspection team had cited 5 principal to principal transactions with the clients in which the Appellant had issued the contract notes in Form A instead of Form B and had also charged brokerage from the clients of these transactions. The Appellant had admitted these as a technical error/omission and pleaded that the brokerage amount of Rs.600/- charged by him through oversight had since been refunded to the clients after it was pointed out by the inspection team. During the hearing of this appeal the learned counsel for the Appellant maintained the same stand and added that the said contracts had been honoured by the contracting parties and there was no dispute whatsoever between the persons to whom such contract notes had been issued. The learned Counsel stated that he had submitted the letters from all these clients confirming this position to the Respondent with his reply dated March 8, 2004 and that he has furnished the affidavit of these clients to whom principal to principal contract notes were issued in Form A instead of Form B confirming the contracts along with the Memorandum of Appeal. The learned Counsel for the Respondent argued that the documentation procedures prescribed in the regulations were necessary for protecting the investor interest and these records came in very handy in deciding matters when there were any disputes between the investors and the intermediaries. He therefore, argued that it was incumbent on all intermediaries to respect these regulations particularly now that they had been in existence for several years.
Regarding © the inspection team had pointed out that the Appellant has not been reporting principal to principal transactions with the clients to the stock exchange. This charge is actually related to the charge regarding contract notes discussed above and the same five transactions have been cited in support of this charge as well. Regarding (d) the inspection team had pointed out that the Appellant had been dealing with M/s. Dishant & Co., as sub broker with out getting them registered with the Delhi Stock Exchange/SEBI. The inspection team pointed out that while the Appellants had been dealing with the sub broker since 1.4.99 they had taken steps to get them registered as sub broker only after receiving intimation regarding SEBI inspection vide SEBI’s letter dated 4.11.2000. Dealing with unregistered sub brokers had been prohibited by SEBI vide Circular No.SMD—1/3118 dated December 27, 1993. In fact this was identified as a serious lapse by SEBI in 1996 when all the stock exchanges were informed vide Circular No.SMD/MDP/CIR/043/96 dated August 4, 1996 that a serious view would be taken if such deficiencies were observed during the course of future inspections of the brokers by SEBI. The inspection team thus pointed out that the Appellant had violated these stipulations thereby adversely affecting the interests of small investors. The Appellant had admitted this lapse but had maintained that the interests of the investor had not been harmed. The Appellant had further contended that they had carried an advertisement in the local Sandhya Dainik Newspaper on 13th August 2003 inviting complaints, if any, against M/s. Dishant & Co., During the proceedings before the enquiry officer the Appellant had also submitted an undertaking pleading to make good any losses that any investor would have incurred or would incur on account of dealings with M/s. Dishant & Co., During the hearing of the present appeal the learned Counsel for the Appellant also contended that there was no guideline or clarity from the regulatory authorities in respect of commencement of business by the sub broker and that it was a presumption in the market that the sub broker could commence business immediately after the application for registration. The learned Counsel for the Respondent however, pointed out that in the present case the sub broker had admittedly commenced his operations with the Appellant atleast from 1.4.99 whereas his application had been forwarded to DSE/SEBI towards the end of the year 2000.
Regarding (e) the inspection team had pointed out 8 instances of delay in payment/delivery on the basis of random checking which was in serious violation of bye-law 246(a)(3) of Delhi Stock Exchange which require payments/deliveries within 2 working days. The Appellant, however, pointed out that payments/deliveries in this case had been held back on the specific written instructions of the clients. The Appellant also produced affidavits from the clients but his contention had not been accepted on the ground that the said letters were not shown during inspection and that it was clearly an after thought with view to covering up his default. During the hearing of the present appeal the learned Counsel for the Appellant argued that even assuming that these letters were obtained subsequently, these letters and affidavits definitely prove that the clients had no grievances regarding these deals. The learned Counsel for the Respondents however, argued that the broking firms must maintain the necessary discipline and the relevant documentation as prescribed by SEBI and the respective stock exchange in the interest of transparent functioning of the market and the interests of investors and that they should not be allowed to take the plea of there being no complaints from the investors.
We have carefully gone through the Memorandum of Appeal and all the annexures thereto, the impugned order, the proceedings before the enquiry officer and the inspection report. We have also carefully applied our minds to the arguments of the learned counsel on both sides as well as the authorities cited by them. On a careful analysis of the entire situation it is obvious that the facts in this case are not in dispute. The only dispute is that while the Appellants contend that they have an impeccable track record and have never come to any adverse notice so far and that these violations are mere omissions or oversights which need be condoned, the Respondents contend that the violations need be visited atleast with a token suspension of one month. The question therefore, really boils down only to the quantum of punishment. Regarding quantum the learned Counsel for the Respondent relied on the Judgement of Hon’ble Bombay High Court in Anand Rathi case in Writ Petition No.628 of 2001 wherein the Hon’ble High Court had observed as follows:
"Bearing in mind the above, it could not be denied that the SEBI was justified in taking the action as it did. A regulatory agency entrusted with the duty to protect the investors must have the capacity to move quickly to curb further mischief and to take action that, in its opinion, is necessary to instill and maintain public confidence in the integrity of the capital market. In the wake of the fall of the market, preliminary inquiry that was conducted by SEBI, revealed prima facie involvement in market manipulations. And to prevent further mischief an order was passed restraining the petitioners from undertaking nay fresh business as brokers. The fall in the market was contrary to the general expectation in view of the Budget. It did not require to be emphasized that this fall demoralized investors, big and small, Indian and foreign, individual, institutional and corporate. In the instant case there was a clear case for SEBI to act swiftly. It is not for the Court, especially while exercising powers under article 226, to analyse the evidence in detail to come to conclusion on the merits of the case. The operation of Stock market and the functioning of brokers is not only highly technical but very complex. In the instant case, the exercise to be carried out would invoke not merely the interpretation of BSE circulars and the parameters of the authority of the President of the BSE but also the collection of the material relating to innumerable transaction, the correlation of the same with various factors such as the time and rate at which they were entered into and also the relationship between the conflicting entries thereto. It is the SEBI and not the Court that must carry out this analysis." And further
"Where no fundamental freedoms are involved, the Courts/Tribunals will only play a secondary role while the primary judgement as to reasonableness will remain with the executive or administrative authority. The secondary judgement of the Court is to be based on Wednesbury or CCSU principles as explained by Lord Greene and Lord Diplock respectively to find out if the executive and administrative authority has reasonably arrived at his decision as the primary authority. The question whether the Courts in our country will apply the principle of "Proportionality""and assume a primary role was left open to be decided in a case where such action is alleged to offend fundamental freedoms under articles 19, 21 etc., and not under article. 14."
We have carefully gone through the ratio laid down in the Anand Rathi case and we find it difficult to agree with the contentions of the learned Counsel for the Respondent that this Tribunal has no role to play regarding the quantum of punishment. In the Anand Rathi case the Hon’ble High Court was essentially examining the issue in the context of the Writ Jurisdiction under Article 226. This is not the situation in the case of this Tribunal which is practically the first as also the last forum of appeal for those aggrieved with the Respondent’s orders except on questions of law where an appeal can be made to the Hon’ble Supreme Court. Secondly the Hon’ble High Court’s observations were in the context of the interim order which had been passed against Anand Rathi pending detailed investigations whereas in the present case the final order has been passed by way of punishment and not by way of an interim measure aimed at preventing further harm to the market. The learned Counsel for the Respondent also argued that it can not be said that the irregularities pointed out during the inspection are of insignificant nature and in a very negligible number of cases as compared to the total turn over of the Appellant. He pointed out that the inspection team had picked up only a few cases at random and that there was a definite possibility of similar irregularities in a large number of cases. We consider this argument as rather specious because penalties can be imposed only on specifically proved violations and not on the basis of apprehensions of similar violations in a large number of cases. We also find that in all the proceedings during inspection, before the enquiry officer as well as before the Board there is no allegation or even an insinuation regarding these irregularities/ violations having been committed with a view to defrauding the investors or deriving any undue personal gain. The learned Counsel for the Respondent also invited our attention to the observations of this Tribunal in some cases to the effect that it was the violation per se and not the quantum of such violations that was relevant for the proceedings in the SEBI Act. As against that the learned Counsel for the Appellant invited our attention to the orders of this Tribunal in the case of Samrat Holdings Ltd., Vs. SEBI (2001) SCL 417(SAT) wherein this Tribunal had observed as under:
"As the acquisition was reported to the stock exchanges and thereby the transparency requirement was fully met with, it is difficult to reasonably conclude that the Appellant had deliberately held back reporting under regulation 3(4). There is no reason to disbelieve , in the absence of clinching evidence to show otherwise, the Appellant’s version that failure was a genuine lapse, as is evident from its conduct of submitting the report suo moto. Belated reporting has neither resulted in any gain to the Appellant nor caused any loss to anybody."
In the light of the above we are inclined to agree with the Appellant that the lapses were through oversight in an insignificant number of transactions as compared to his overall business. However, there is no denying that the violations were indeed there which should not have been there and SEBI being mandated to ensure transparency and orderliness in the market, it is their business to impose punishments wherever any violations are noticed. However, we find that issuing of a warning is also one of the minor penalties as is the case with the suspension of registration for one month. On the basis of an overall assessment of the extent and quantum of violations it would have been in order, in our view, if SEBI had issued a warning to the defaulting broker. However, since the Respondent SEBI has chosen to resort to suspension of certificate of registration, we believe that the ends f justice will be met if this suspension is merely a token suspension for one day instead of one month.
The order of SEBI is, therefore modified to the above extent and the appeal is disposed off accordingly.
Sd/- Sd/-
B. SAMAL N. L. LAKHANPAL
Place: Mumbai,
Date: January 20, 2004.