IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.85/2003
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Date of Hearing
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10.01.2005
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Date of Decision
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20.01.2005
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In the matter of:
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KAYNET CAPITAL LTD.,
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Appellant – Represented by
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Mr. Bharat Merchant, Advocate
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Versus
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Securities & Exchange Board
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Respondent – Represented by
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of India
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Mr.Kumar Desai, 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. The Appeal is taken up for disposal with consent of both parties.
2. The appeal has been filed against the impugned order of the Respondent dated 12th June, 2003 which reads among others as under:
“15.0 ORDER
15.1 I find that the said broker has committed several violations as observed above and has not taken due care and diligence in observance and compliance of the statutory requirement in conduct of its business as a stock broker. Looking into the violations committed by the said broker, I am satisfied that it is necessary to secure the proper management of the stock broker and also in the interest of the securities market that a penalty of suspension of certificate of registration for a period of four months as recommended by the enquiry officer is reasonable. Therefore, in exercise of the powers conferred upon me by virtue of sub section (3) of section 4 of the Securities and Exchange Board of India Act, 1992 read with regulations 13(4) and 13(6) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 I hereby order that the certificate of registration no. INB 011056737 of M/s. Kaynet Capital Ltd., a member of the Stock Exchange, Mumbai be suspended for a period of four months.
This order shall come into force with effect from three weeks from the date of the order.”
3. The appellant had prayed for an interim order staying the operation of the impugned order as the order was to come into force with effect from 03.07.2003. The appellant’s prayer for interim order was heard by this Tribunal. After hearing both the parties, this Tribunal vide its order dated July 1, 2003 stayed the operation of the impugned order for a period of three weeks initially and subsequently it was extended till the disposal of the case finally.
4. The brief facts of the case is that the appellant is a member of the Bombay Stock Exchange and registered with SEBI vide certificate of registration no. INB 011056737. An inspection of the books of accounts documents and other records of the appellant was conducted in November, 2000 by V. Parekh & Associates (Chartered Accountants) on behalf of SEBI. A copy of the Inspection Report was forwarded to the appellant by SEBI vide letter dated 9th March, 2001. The appellant submitted its reply and on not being satisfied with the reply vis-à-vis the inspection report, an Enquiry Officer was appointed vide order dated 8th May, 2002 to conduct an enquiry into the contraventions alleged to have been committed by the appellant.
5. The Enquiry Officer after conducting the enquiry as per the procedure laid down under SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 submitted a report dated 30th November, 2002. The Enquiry Officer concluded that the appellant had committed irregularities pertaining to dealing with unregistered stock brokers, failure to enter into agreement with the sub brokers, delay in delivery of securities to clients, delay in issuance of contract notes, failure to maintain order book, failure to maintain client registration agreement and failure to ensure continuous preprinted serial numbers on the contract notes. The enquiry officer recommended that the registration of the appellant be suspended for a period of four months. Subsequently a show cause notice dated 7th February, 2003 was issued to the appellant along with a copy of the Enquiry Report. The appellant submitted a reply vide letter dated 20th February, 2003. An opportunity of personal hearing was given to the appellant on 9.4.2003. After considering the submissions made by the appellant, Chairman, SEBI vide order dated 12th June, 2003 suspended the certificate of registration of the appellant, member of the Stock Exchange, Mumbai for a period of 4 months.
6. The learned counsel for the appellant submitted that the order of suspension for a period of four months is too harsh looking to the irregularities committed by the appellant which has been during the course of inspection. He quoted the following law cases in this regard:
1. Satco Securities & Financial Services Ltd.,
V/s. Chairman, SEBI
2. Subhkam Securities (P) Ltd., V/s. Chairman, SEBI
3. Radar Securities Ltd., V/s. SEBI
4. Chona Financial Services (P) Ltd., V/s. SEBI.
7. The learned counsel for the appellant Mr. Merchant further submitted that the irregularities found at the inspection have been rectified. The Bombay Stock Exchange has also conducted another inspection subsequent to this inspection.
8. Regarding the charge that the appellant has carried out transactions with unregistered sub-brokers, in the Memo of Appeal the appellant has stated that “in good faith we have allowed the said constituents who are members of PSE, to effect the transactions through our BOLT with a condition that they must report the said transaction to PSE. We may further point out to you that the transaction carried out by the said constituents were mostly their own transactions which fact is confirmed by them in writing……… Apart from that during the inspection process as soon as we realized that registration of sub brokership is necessary we have already got the said members of PSE registered with SEBI as sub-brokers which fact is also recorded by the Enquiry Officer….” This was also confirmed by the learned counsel for the appellant during the hearing. It indicates that the appellant was carrying out transactions with unregistered brokers.
9. Regarding the charge that the appellant has carried out transactions with the entities that were not registered as remisiers with BSE the appellant in the Memo of Appeal has also stated that they have lodged the applications with the Stock Exchange, Mumbai for registering all those persons as their remisiers. The appellant has also admitted that the said mistake was unintentional and was on account of lack of precise knowledge of procedure.
10. Regarding the charge that there have been delays in making payments as well as in making deliveries to clients it was stated that there are letters from constituents requesting the appellant not to make payment. Similarly there are letters from the constituents/ sub brokers also to the effect authorizing them to retain the deliveries.
11. Regarding the charge that there was delay in issuing contract notes to clients, the appellant has admitted that there were only 7 instances of delay in issuing contract notes throughout the period of 1½ years. Apart from that they had also pointed out to the Enquiry Officer that immediately on execution of the trades they send the transaction statement through e-mail at the end of every trading day confirming therein that the transactions have been effected and subsequently the contract were issued. Not a single client has made any complaint or dispute in respect of transaction effected by them. The appellant has also stated that their staff members have been issuing thousands of contract notes and delivering them. It is human to commit mistake some time. They have admitted in the memo of appeal that there was clerical and administrative delay, and they have instructed the staff to be more vigilant.
12. With regard to the charge that the contract notes did not bear pre printed serial numbers the appellant confirmed that they have started using pre printed serial numbers on the contract notes in compliance with the SEBI Guidelines.
13. The learned senior counsel for the Respondent Mr. Kumar Desai submitted that in the given facts and circumstances of the case and the violations committed by the appellant, penalty imposed against him is fully justified. It was submitted by him that the order dated 12/6/2003 at para 12.2 is specifically brought out violation of bye laws No.257A(4) of Bye laws of BSE for delay in issue of contract notes. Therefore, the contention of the appellant is not tenable. After considering all the submissions of the appellant the enquiry officer gave the finding that the appellant dealt with 22 unregistered sub brokers as stated in the show cause notice. Out of this 4 entities got registered before the date of inspection, but their registration does not extend to the transactions covered in the period of inspection. Seven entities appear to have applied for registration during November, 2000 i.e. the month in which inspection has commenced, since their registration certificates are dated November, 2000. Nine entities applied for registration after closure of the inspection and 2 entities who are members of the Pune Stock Exchange have not even applied for registration as sub brokers.
13. Learned senior counsel further submitted that unless the broker transfer the securities /funds to the sub broker the sub broker would not be in a position to honour his commitment to his clients. Any delay or deficiency on the part of the broker would lead to delay on the part of the sub broker. Even accepting the submission of the appellant that these were clients of the sub broker it was the duty of the appellant to bring to the notice of the sub broker which is a requirement of SEBI Circular in this regard. Further the broker is responsible for any act of omissions and commissions of his agent, the sub broker. He further submitted that the appellant’s submission that contract notes have always been e-mailed to the parties and delivery on the basis of e-mail is accepted and is proper form of delivery is not tenable. The contract notes have to be properly stamped and signed by the broker. Therefore, sending the contract notes via e-mail is not a substitute for contract notes properly acknowledged and is not tenable as per the SEBI Circular No.SMD/SED/CIR/93/2332 dated November 18, 1993. The inspection report a copy of which was forwarded to the appellant on March 9, 2001 mentions that in few cases the transactions were not routed through the exchange and these transactions were valued at Rs.247.42 lakh. The broker failed to reply to these observations made in the inspection report. It may be relevant to mention that the inspection report lists out a few instances of off the market transaction valued at Rs.2247.42 lakh. During the course of inspection various books of accounts and other documents are examined at random and test check basis, during which these violations relating to off market transactions were noticed. It is possible that there are other such instances which could have come to light if a full and thorough inspection was undertaken and the impact could be much greater. Therefore the submission of the appellant that off the floor transaction was less than 1.18% of the total turnover is apparently not based on facts and is intended to mislead the appellate authority. SEBI vide Circular No.SMDRP/POLICY/CIR/32/99 dated September 14, 1999 had banned all negotiated deals including cross deals. All such deals are required to be executed only on the screens of the exchanges in the price and order matching mechanism of the exchanges just like any other normal trade. This circular does not provide for any exemption on the basis of turnover or otherwise. The submission of the learned counsel for appellant that the irregularities have been subsequently rectified indicates that there were irregularities which attracts necessary penalties. It was, therefore, submitted by the learned counsel for the respondent that the impugned order be upheld.
14. Heard both the parties. We have carefully considered the pleadings and submissions made by counsel for both the parties and the material on record. In appeal No.145/2003 in the matter of
Ansh Portfolio Kendra Pvt. Ltd.,V/s. SEBI this Tribunal in a similar case has upheld the impugned order but had reduced the period of suspension to one day. Taking all the facts and circumstances of the case we admit that there should be parity in the penalties that are imposed on the appellants as in other cases, otherwise it leads to charge of discrimination.
15. More than anything else we feel every opportunity should be given to the broker to rehabilitate himself. The alleged irregularities took place long back in the year 2000 and there is an interim order staying the operation of the impugned order pending disposal of the appeal.
16. It is observed that the appellant has had a good track record. There is also no denying the fact 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 in order for them to impose penalties wherever any violations are noticed.
17. We therefore, uphold the impugned order. However, looking to the law cases submitted before us we are inclined to reduce the period of suspension to one day instead of 4 months. The impugned order is, therefore, modified to the above extent and the appeal is disposed of accordingly.
No order as to costs.
Sd/-
Justice Kumar Rajaratnam
Presiding Officer
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N.L. Lakhanpal
Member
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Dr. B. Samal
Member
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Place: Mumbai
Date: January 20, 2005.