IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.88/2003
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Date of Hearing
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17.01.2005
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Date of Decision
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28.01.2005
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In the matter of:
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Sanghvi Brothers Brokerage Ltd.,
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Appellant – Represented by
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Mr. Shyam Diwan, 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 18th June, 2003 which reads among others as under:
“6.0 ORDER
6.1 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 one month as recommended by the enquiry officer is reasonable. Therefore, I 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 010992132 of M/s. Sanghvi Brothers Brokerage Ltd., a member of the Stock Exchange, Mumbai be suspended for a period of one month.
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 08.07.2003. The appellant’s prayer for interim order was heard by this Tribunal. After hearing both the parties, this Tribunal vide its order dated July 8, 2003 stayed the operation of the impugned order for a period of eight weeks initially and subsequently it was extended till the disposal of the case finally.
4. The brief facts of the case are as under:
Sanghvi Brothers Brokerage Limited (hereinafter referred to as the broker) is a member of Bombay Stock Exchange (hereinafter referred to as BSE) and registered with the Securities and Exchange Board of India (hereinafter referred to as SEBI) with registration No. INB 010992132.
An inspection of books of accounts, documents and other records of the appellant was conducted in the month of December, 2000 and also in January and February, 2001. A copy of the inspection report was forwarded to the broker vide SEBI’s letter dated 20.3.2002. The broker submitted its reply vide his letter dated 17.4.2002 and on not being satisfied with the reply of the broker vis-à-vis the inspection report, an enquiry officer was appointed vide order dated 19..7.2002 to conduct an enquiry into the contravention/s alleged to have been committed by the broker.
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 17.12 2002. The Enquiry Officer concluded that the appellant had committed irregularities pertaining to failure to issue contract notes, failure to maintain client registration agreement, failure to ensure continuous preprinted serial numbers on the contract notes, failure to mention time stamping of orders, non-segregation of own funds from that of client’s funds, delay in transfer of demat scrips from members pool account and failure to obtain client’s acknowledgement on duplicate copies of contract notes. The enquiry officer recommended that the registration of the appellant be suspended for a period of one month. 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 3.3.2003 and a further reply dated 20th February, 2003. An opportunity of personal hearing was given to the appellant on 30.4.2003. After considering the submissions made by the appellant, Chairman, SEBI vide order dated 18th June, 2003 suspended the certificate of registration of the appellant, member of the Stock Exchange, Mumbai for a period of 1 month.
5. The learned senior counsel for the appellant submitted that delay of 7 days in delivery of shares to M/s. Master Consultancy was after taking his express consent. Contract notes were not issued for carry forward transactions as the settlement bill gives the complete details. Pre-printed numbers on annual basis were not given on the contract notes since the software vendor did not provide the facility. Now it is being done. Time stamping of orders was not done in contract notes since the BSE download does not provide this facility. Regarding non maintenance of client agreement, the broker stated that this is being implemented now. Regarding non-segregation of own funds and clients funds, the learned senior counsel submitted that the amount drawn from clients account for own purpose was very small compared to the turnover and there were only two such instances pointed out by the Enquiry Officer which were probably due to the non availability of the authorised signatory. Delay in transfer of securities from the pool account was due to introduction of the new concept of demat trading at that time which was not fully understood. Now there is no such lapse. Client acknowledgement with date and time are now being obtained.
7. The learned senior counsel for the appellant quoted the following cases in which this Tribunal modified the orders of the respondent suspending the respective appellants to give a warning to the appellants.
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Sr.No.
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Date
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Appeal No.
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Particulars
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1.
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29.10.2004
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102/2003
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Prakash K. Shah Shares & Securities Pvt. Ltd., Vs. SEBI
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2.
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23.08.2004
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95/2003
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Chona Financial Services Pvt.Ltd., Vs. SEBI
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3.
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31.08.2004
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53/2003
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Samkit Shares & Stock Brokers Pvt. Ltd.,
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8. The learned Senior Counsel for the appellant also submitted a statement as under showing cases where similar irregularities were punished only by warning:
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Sr.No.
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Irregularities
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Warning by SEBI
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Warning by SAT
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1.
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Irregularities in issuance of contract notes.
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Irregularities are not specified in the following press release .
1. M/s.Ratnabali Capital Markets Ltd.,
Ref. no.PR 32/2002 dated 19/02/2002.
2. M/s. Sanjay C. Baxi. Ref. no.PR 68/2002 dated 28/03/2002
3. M/s. Mahesh Kothari Shares & Stock Brokers Pvt. Ltd., Ref. no. PR 35/2002 dated 19/02/2002
4. M/s. Mukesh Sawhney. Ref.no.PR 34/2002 dated 119/02/2002
5. M/s. IFB Securities Ltd., Ref.no. PR 33/2002 dated 19/02/2002.
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a. Contract notes not issued for carry forward transactions.
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1. J.M. Morgan order dated 02/06/2004
Ref.MO/14/MIRSD/06/04.
2. M/s. Bakliwal Investment.
Order no.,WTM/13/2004/MIRSD.
Order dated 18/05/2004
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1.Prakash K. Shah Shares & Securities
Order dated 29/10/2004
Ref.no.102/2003.
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b. Preprinted numbers on annual basis not given on the contract notes
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1. J.M. Morgn order dated 02/06/2004
Ref.MO/14/MIRSD/06/04.
2. Bama Securities Ltd., order no.CO/02/MRD/06/2004 dated 04/06/2004
3. M/s. Bakliwal Investment.
Order no.WTM/13/2004/MIRSD.
Order dated 18/05/2004
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1.Prakash K. Shah Shares & Securities
Order dated 29/10/2004
Ref.no.102/2003.
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c. Time stamping of orders not done in contract notes
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1. M/s. Bakliwal Investment.
Order no.WTM/13/2004/MIRSD.
2. Bama Securities Ltd., order no.CO/02/MRD/06/2004dated 04/06/2004
3. Chandrakala Money and Capital Management Limited. Order dated: 13/12/2004 (Notice discharged)
4. Rama Securities Pvt. Ltd., Order dated: 01/11/2004 (Notice discharged)
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1.Chona Financial Services Pvt. Ltd.,
Appeal No.95/2003 Order dated 23/08/2004
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d.Client acknowled- gement obtained without date on contract notes.
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1. J.M. Morgan order dated 02/06/2004
Ref.MO/14/MIRSD/06/04.
2. Bama Securities Ltd., order no.CO/02/MRD/06/04 dated 04/06/2004
3. M/s. Bakliwal Investment.
Order no.WTM/13/2004/MIRSD.
Order dated 18/05/2004
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1.Chona Financial Services Pvt. Ltd.,
Appeal No.95/2003 Order dated 23/08/2004
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2.
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Delay in delivery of physical share & transfer of securities from pool account.
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1. M/s. Bakliwal Investment.
Order no.WTM/13/2004/MIRSD.
Order dated 18/05/2004
2. M/s. Sanjay C. Baxi. Ref. no.PR 68/2002 dated 28/03/2002
3. M/s. Mahesh Kothari Shares & Stock Brokers Pvt. Ltd., Ref. no. PR 35/2002 dated 19/02/2002
4. M/s. IFB Securities Ltd., Ref.no. PR 33/2002 dated 19/02/2002.
5. J.M. Morgan order dated 02/06/2004
Ref.MO/14/MIRSD/06/04.
6. Parackal Investments Order dated 02/12/2004. (Notice discharged)
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1.Chona Financial Services Pvt. Ltd., Appeal No.95/2003 Order dated 23/08/2004.
2. Samkit Shares & Stock Brokers Pvt. Ltd., Appeal No.53/03 Order dated 31/08/2004.
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3.
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Non maintenance of Client’s Agreement
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1. Bama Securities Ltd., order no.CO/02/MRD/06/04 dated 04/06/2004
2. M/s. Bakliwal Investment.
Order no.WTM/13/2004/MIRSD.
Order dated 18/05/2004
3. J.M. Morgan order dated 02/06/2004
Ref.MO/14/MIRSD/06/04.
4. M/s. Sanjay C. Baxi. Ref. no.PR 68/2002 dated 28/03/2002
5. M/s. IFB Securities Ltd., Ref.no. PR 33/2002 dated 19/02/2002.
6 . Rama Securities Pvt. Ltd., Order dated: 01/11/2004 (Notice discharged)
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4.
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Non segregation of own funds & clients funds.
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1. J.M. Morgan order dated 02/06/2004
Ref.MO/14/MIRSD/06/04.
2. M/s. Twenty-First Century Share & Securities Ltd., Ref No.PR 31/2002 dated 19/02/2002.
3. M/s.Ratnabali Capital Markets Ltd.,
Ref. no.PR 32/2002 dated 19/02/2002.
4. M/s. Sanjay C. Baxi. Ref. no.PR 68/2002 dated 28/03/2002
5. M/s. Mahesh Kothari Shares & Stock Brokers Pvt. Ltd., Ref. no. PR 35/2002 dated 19/02/2002
6. M/s. Mukesh Sawhney. Ref.no.PR 34/2002 dated 19/02/2002
7. M/s. IFB Securities Ltd., Ref.no. PR 33/2002 dated 19/02/2002.
8. M/s. Bakliwal Investment.
Order no.WTM/13/2004/MIRSD.
Order dated 18/05/2004
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Chona Financial Services Pvt. Ltd., Appeal No.95/2003 Order dated 23/08/2004.
Samkit Shares & Stock Brokers Pvt. Ltd., Appeal No.53/03 Order dated 31/08/2004.
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9. The appellant has also submitted an affidavit as was asked in the court which inter alia reads as under:
a. The Appellant have filed the above Appeal against the Order dated 18th June, 2003 passed by the Respondents (“the Impugned Order”). By an Order dated 8th July, 2003, this Hon’ble Tribunal was pleased to stay the implementation and operation of the said Impugned Order for a period of 8 weeks. The said Impugned Order was extended from time to time and finally by an order dated 19th January, 2004, this Hon’ble Tribunal was pleased to extend the Interim Order till the disposal of the above Appeal.
b. During the course of the hearing of the above Appeal held on 17th January, 2005, the Hon’ble Tribunal had inquired from the Appellant regarding inspection (if any) carried out by the Stock Exchange, Mumbai (“BSE”) subsequent to the impugned SEBI order dated 18th June, 2003.
c. This Affidavit is filed to place on record the facts relating to inspection by the BSE.
d. On 14th December, 2004, an inspection was carried out by the Inspection Team of BSE of our books of account and other documents, which was a follow-up of earlier inspection carried out in December, 2002. I say that no lapses were found in the course of said inspection.
e. Prior to the order impugned in this Appeal, in December 2002, BSE had inspected the Books of Account and other documents of the Appellant Company, pertaining to Sett.No.155-177/02-03 during the period 7th November, 2002 to 10th December, 2002. The said inspection was carried out by M/s. Manek & Associates, Auditors appointed by BSE. I say that after the inspection in December 2002, BSE on 24th February, 2003 forwarded a report setting out the observations made by the Auditors during the inspection and sought Appellant’s reply to the observation made by the Auditors.
f. Accordingly, on 4th April, 2003, the Appellant Company submitted its reply to the aforesaid report dated 24th February , 2003, whereby setting out the correct facts. After considering the reply filed by the Appellant, the BSE forwarded their final inspection report dated 10th October, 2003 concluding as under:
(i) Out of 109 Broker-Client Agreement selected for verification, 4 (four) were not available and certain clients, registration forms were incomplete in certain respects. A fine of Rs.10,000/- was imposed for the same.
(ii) For all other observations of technical lapses, BSE asked Appellant to file a compliance report within 30 days from the receipt of the Order.
All such directions were given for certain technical lapses and no harm had been caused due to such technical lapses, which were caused due to inadvertence. The fine of Rs.10,000/- was paid to BSE.
g. On 10th November, 2003 the Appellant Company filed its Compliance Report with BSE. In the said Compliance Report, the Appellant Company brought to the notice of BSE that all the observation of technical lapses pointed out by the BSE in its report dated 10th October, 2003 have been removed by the Appellant and had complied with all the directions given by BSE in the said Report.
h. I say that the audit team of BSE in December 2004 i.e. after the Order dated 18th June, 2003 passed by the Respondent had once again inspected Books of Accounts and other documents of the Appellant Company. It is pertinent to note that the said inspection was a follow-up by BSE to ensure that whether the Appellant have complied with the directions issued by it in its Report dated 10th October, 2003 and whether the Appellant are carrying on the business in consonance with the established practices of the trade.
i. Thereafter, the Company requested BSE to give a copy of the report of inspection done in December 2004. However, the Assistant General Manager (Inspection Department) BSE had intimated us orally that they give their report only when there are adverse observation made in the course of inspection. The Assistant General Manager further orally informed us that the outcome of the inspection is satisfactory and no adverse remarks have been drawn. Thus, I say that the Appellant Company have effectively complied with the Bye-laws, Laws, Rules and the Regulations of the BSE and the Respondents.
j. In view of the above, I respectfully beg to say that the Appellant Company have made every endeavour and is taking all possible care and caution to carry on its share and stock broking business in accordance with the statutory requirements. Further, all the infractions and lapses have been removed by the Appellant Company and it is evidently clear that BSE after taking inspection in December 2004 have accepted that we are carrying on business in consonance with all the Rules and Regulations.
k. I further say that any adverse order passed by the Tribunal will cause irreparable harm, loss and injury to the reputation and standing of the Appellant and will result in civil death of the Appellant. The whole business of the Appellant will collapse, its sub-brokers and employees will loose their jobs and consequently their daily livelihood. The Appellant begs to give its details of business as on December 2004 as under:
1. No. of people employed : 21
2. No. of Sub-brokers and remisiers : 32
3. No. of branches & franchises : 14
4. No. of registered clients : 1850 (approx.)
5. Monthly turnover : Rs.310 Crores.
l. I say that this Hon’ble Tribunal in its judgment in Prakash K. Shah Shares and Securities Ltd., Chona Financial Services Pvt. Ltd. and Samkit Shares & Stock Broker Pvt. Ltd. have taken a lenient view in respect of similar charges and technical lapses and in fact set aside the orders passed by the Respondents. I, therefore, beg to say that having regard to the gravity of charges and doctrine of proportionality, similar view ought to be taken by the Hon’ble Tribunal.
m. I say that in the circumstances, the Appellant Company further assures this Hon’ble Tribunal that it will take all possible care and caution to ensure that its broking business is being done in accordance with the laws, bye-laws, rules and regulations of the Exchange and the Respondent.”
10. The Shri Kumar Desai, learned senior counsel for the Respondent denied that the Respondent has failed to appreciate the submissions made by the appellant before the Chairman of the Respondent and before the Enquiry Officer. It is also submitted by him that in respect of the transactions on behalf of M/s. Master Consultancy the appellant has stated that the said clients had requested them to hold delivery of the shares due to them and that it was impracticable to go to Ulhasnagar to deliver the shares to the clients. The said submissions can not be considered as sufficient reasons to delay the delivery of the shares to the clients in violation of the Code of Conduct. Only after receipt of the show cause notice did the appellant thought it necessary to obtain the confirmation from the client which obviously was done as an after thought. The argument that if the client had any complaint he would not have given confirmation is frivolous. He also denied that there was an exemption granted regarding issue of contract notes in respect of any carry forward transactions since the settlement bills gave the complete details. It is submitted that even in respect of Badla transactions., an investor can take recourse to the Dispute Redressal Mechanisms of the Stock Exchange only when he or she is issued contract note by the broker. By not issuing contract notes the appellant has put the investors at risk in that he would not have had any recourse of Dispute Redressal Mechanism. This is besides the fact that the appellant has violated the Code of Conduct of Stock Brokers. In view of this, non issue of contract notes by the appellant can not be treated as a mere procedural irregularity. It is also incorrect to say that there was no direction from the respondent for continuous numbering of contract notes on an annual basis. The appellant can not attribute failure to ensure that contract notes are pre printed with serial numbers on the software or software vendor. The requirement of pre-printed serial numbers on contract notes have been stipulated by the respondent in order to ensure that orders are executed by the brokers in the order in which they are received and there is no irregularity in the issue of contract notes to the clients.
11. Shri Desai also denied that the provisions do not require the date of acknowledgement to be mentioned by the client. The acknowledgement of the clients on duplicate of the contract notes issued by the appellant is required to prove that they had indeed received the contract notes. Mere acknowledgement without mentioning the date is meaningless and does not serve the purpose of recording acknowledgement. The requirement of recording the time of placement on the contract note was also stipulated by the Respondent in order to ensure that the broker carried out the orders of his client without undue delay. The appellant cannot take shelter behind the argument that software of BSE does not provide for recording time of placement of order. It is the duty of the appellant to ensure that their back office software provides for recording the said time in the contract notes issued by them. The appellant had also obtained proper client agreements only after it was pointed out in the inspection report that the same had not been obtained. The action of the appellant in obtaining the client agreement after the inspection report point out that the same amounts to admission that they have failed to obtain the agreement and hence violated the Code of Conduct.
12. The learned counsel for the respondent further submitted that the appellants have failed to prove conclusively that the amounts withdrawn from the clients’ accounts was their own money. The explanation that the brokerage received from the clients was retained in the client’s account instead of the broker’s account indicates that the broker was not maintaining a strict segregation between his moneys and those of the clients.
13. The learned counsel Shri Desai further submitted that the appellant has committed several violations as observed in the impugned order and has not taken due care and diligence in the observations and compliance of the statutory requirements in conducting its business as a stock broker. In view of the serious nature of violations committed by the appellant and also in the interest of securities market, a penalty of suspension of certificate of registration for a period of one month has been imposed which is reasonable.
14. After hearing both the parties we observe that the irregularities can not be treated as a very serious irregularity. It can not also be said that the nature of punishment should be so harsh that the appellant would have to cease the work for a period of one month. The appellant has 1850 clients, 21 employees and 14 branches-franchises. The consequences are far reaching not only to the appellant but also to his clients and employees. The appellant has put in place the appropriate back up system to adhere to the various requirements of the said rules.
15. We have no doubt the Respondent was justified in finding that the appellant was in violation of the SEBI (Stock broker & sub broker) Regulations, 1992. However, we feel that every opportunity should be given to the appellant to rehabilitate itself. Further the appellant has in his affidavit stated that after the impugned order dated 18th June, 2003 the BSE had inspected the books of accounts and other documents of the appellant company and no adverse remarks have been drawn by the BSE thereon.
16. In the facts and circumstances of the case we modify the impugned order and substitute by imposing a minor penalty under Regulation 13(1) (a) (i) and hereby give a strong warning. The impugned order is, therefore, modified to the above extent and the appeal is disposed of accordingly.
No order as to costs.
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 28, 2005.