ORDER
ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF M/S. JCM CAPITAL SERVICES PRIVATE LTD., MEMBER-DSE
Pursuant to the findings of inspection of the books of accounts and documents of JCM CAPITAL SERVICES PVT. LTD., MEMBER-DSE, SEBI REGISTRATION NO. (INB050963230) hereinafter referred to as “JCM”, adjudication proceedings were initiated against JCM. The undersigned has been appointed as the Adjudicating Officer in terms of an order dated August 06, 2004 under Section 15-I of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘the said Act’) and Rule 3 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘the SEBI Rules’) to enquire into and adjudge the alleged contravention of 15A(c), 15B and 15F(a) of the said Act by JCM.
NOTICE
A notice dated December 14, 2004 under Rule 4(1) of the said rules was issued to JCM communicating the charges leveled against it based on inspection of the books of accounts and other documents conducted by M/s Vipin Om & Associates, Chartered Accountants, (the inspection authority appointed by SEBI) for the period 01.04.2000 to 31.10.2002. The said notice provided the details of the provisions of law and the violations alleged to have been committed by JCM. The report related to the said inspection was provided to JCM vide letter dated December 14, 2004.
REPLY
Reply to the aforesaid notice was received from JCM vide its letter dated December 31, 2004. Further submissions were also made by JCM vide its letter dated January 14, 2005.
PERSONAL HEARING
An opportunity of personal hearing in the matter was extended to JCM (vide notice dated December 14, 2004) for December 31, 2004, which was rescheduled to January 19, 2005 (vide letter dated December 31, 2004). JCM vide its letter dated January 14, 2005 inter alia indicated that it does not have to submit further reply other than their letter dated December 31, 2004 and that it is not interested in coming to Mumbai office for the hearing. Some additional submissions were made vide JCM’s letter dated January 14, 2005.
RELEVANT PROVISIONS OF LAW
Before I proceed to deal with the case, it would be pertinent to make a reference to the relevant provisions of the said Act as alleged to have been contravened by JCM.
Section 15 A If any person, who is required under this Act or any rules or regulations made there under:
c) to maintain books of account or records, fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
Section 15 B If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made there under to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
Section 15 F “If any person, who is registered as a stock broker under this Act,
(a)fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker;”
I now deal with the submissions made by JCM for the purpose of this adjudication.
1. ALLEGATION: NON-MAINTENANCE OF ORDER BOOK AND DOCUMENTS REGISTER
It was observed during inspection that JCM was not maintaining order book and documents register and no order receipts / confirmation slips were issued to the clients.
REPLY
JCM has submitted that the order book was not being maintained by them as most of the orders were received on phone from the clients which were entered into the trading terminal immediately. JCM has further stated that since in the online system of trading the rates fluctuate every moment, the time taken in entry in order book may result in change of rates in market and therefore it was not practically possible to maintain the order book. It has been further submitted that issue of order slips was also not practical as the clients normally deliver the orders on phone.
As regards the documents register, JCM has stated that during the period under consideration all the scrips dealt in were in demat form which do not contain any distinctive nos. and that they had maintained the scrips ledger of securities in their software which was shown to the inspection team. It has been further submitted that under demat securities the scrips ledger will contain all the particulars as in the documents register. JCM has also undertaken to modify their software and maintain document register as prescribed when the trading at DSE commences again.
FINDING
The contentions made regarding the non-maintenance of the order book and non-issue of confirmation slips in a purely functional perspective, do not justify the non-compliance of regulatory requirements in this regard. At the same time, however, it is observed that in screen based trading, the order log book can be generated once the orders are entered directly into the trading terminal. As such, a lenient view can be taken on the charge.
As regards non-maintenance of documents register, it is noted that JCM has maintained the scrip ledger and undertaken to modify the software and maintain document register as prescribed on recommencement of trading at DSE. I find the submissions made by JCM acceptable.
2. ALLEGATION: NON-EXECUTION OF CLIENT AGREEMENTS
It is stated that JCM had not obtained the client registration forms from the clients and client agreement had also not been entered with most of the clients. The names of 14 such clients from whom registration forms / agreements had not been obtained were specified in the notice dated December 14, 2004 issued to JCM.
REPLY
JCM has stated that most of the clients as reported by the inspection team were old clients or the clients who had started the transactions in 2000–01 and in most of the cases clients had also discontinued the transactions in 2000–01. The statement of start of transactions and close of transactions with these clients has been submitted with the reply.
It has been stated that the books of accounts were inspected by the Delhi Stock Exchange (DSE) for the financial year 2000–01 & 2001- 02. It has been further stated that the inspection for the financial year 2001–02 was conducted by the exchange during September 2002 and all the agreements executed by the member with clients were shown to the inspection team of DSE which is evident from the DSE’s inspection report wherein no violation of non execution of client agreement has been reported by them. Copy of the said report has been annexed to JCM’s reply.
JCM has further stated that due to the closure of trading on DSE, most of the staff was relieved by them and somehow the file containing the clients agreements was misplaced during the course of inspection by DSE and therefore it could not be presented to the inspection team of SEBI.
JCM has contended that the agreements with clients were duly executed by them and thus they have not violated section 15B of the SEBI Act.
FINDING
It is observed that the DSE inspection report cited by JCM in its contentions covers the financial year 2001-02 and as such, apparently, it would not have covered the clients who had traded only in 2000-01 or prior to that. By its own admission, most of the clients as specified in the allegation were old clients who had conducted the transactions only in 2000–01 or prior to that. Non-compliance in respect of these clients finds mention in the SEBI inspection report which covered a longer period from 01.04.2000 to 31.10.2002. While JCM has contended that all the client agreements were shown to the DSE inspection team, the DSE inspection report gives no such indication. As such, JCM’s contention about execution of agreements with clients on the strength of the argument that no violation in this regard was reported by DSE inspection team is unsubstantiated.
JCM’s further contention about their inability to show the file containing clients agreements to the SEBI inspection team as the same had been lost is also not acceptable.
As JCM has not submitted any evidence in support of its contention of having executed the client agreements, I find that it had not complied with the requirements related to execution of client agreements as brought out by the inspection team and therefore violated section 15B of the SEBI Act.
3. ALLEGATION: IMPROPER ISSUE / MAINTENANCE OF CONTRACT NOTES
It has been stated that the following irregularities were observed with respect to the issue of contract notes:-
i. JCM had not issued confirmation memo to clients for the trades done in NSE and only purchase and sales bill were prepared.
ii. The contract notes issued by JCM did not bear time of order. The order slips / book was not maintained. The time of execution of order was also not reflected in the contract notes. JCM had also not obtained dated acknowledgement from clients.
iii. The contract notes issued by JCM did not bear pre-printed serial numbers. The serial number was generated by computer and initialized every day i.e. computer generated number was not initialized on the start of the financial year.
iv. Broker note stamps on the original contract note were not affixed. No expenditure on account of broker note stamp had been incurred by JCM.
REPLY
JCM has submitted that it started using the contract notes bearing preprinted serial numbers and furnished copies of cancelled preprinted contract note. It has been further submitted that as there is no trading activity on DSE during the period 01.04.2002 till date, no contract notes have been issued. Certificate of DSE indicating nil turnover by JCM during 2002-03 and 2003-04 has been furnished with the reply. JCM has undertaken to remove all the irregularities pointed out by the inspection team on resumption of trading activities of DSE or DSE Financial Services Ltd.
JCM has further contended that as it has issued the contract notes for all the trades done by the clients which has also been accepted by the inspection team, there is no violation of section 15F(c) of SEBI Act.
FINDING
The SEBI inspection has brought out the violations observed during the period 01.04.2000 to 31.10.2002 and as such JCM’s submission that it had no turnover at DSE since 01.04.2002 till date is irrelevant. As the allegations relate to irregularities in the issue/maintenance of contract notes, JCM’s contention that it had issued the contract notes for all the trades is not the issue in question and therefore irrelevant. While JCM might have started using contract notes bearing preprinted serial numbers (though by its own admission it had no turnover at DSE since 01.04.2002), it was not doing so earlier as pointed out by the inspection team.
I find that JCM has not addressed each of the issues raised in the allegation specifically. Its undertaking to remove all irregularities implies admission of the lapses in the past in violation of section 15F(a) of SEBI Act.
FURTHER SUBMISSIONS MADE BY JCM
JCM has made the following additional submissions through its letters dated December 31, 2004 and January 14, 2005:
· there is no willful violation of the provision of the SEBI Act, 1992 by it and that the irregularities reported are of the nature of procedural lapses on account of shortage of staff due to closure of trading on DSE.
- it has not violated any provision resulting in the loss to the investor and that there is no complaint by any investor against the member either with Exchange or SEBI.
- the record of JCM in DSE is neat and clean
- there is no trading activity in DSE since 1-4-2002 till date
- they shall follow the rules and regulations of SEBI when DSE restarts functioning.
It has been pleaded by JCM that as it has not made any violation of serious nature, the Adjudication proceedings may be finalised without levy of any penalty.
In order to adjudge the quantum of penalty, I have to consider the following factors as provided in the Section 15J of Securities and Exchange Board of India Act 1992:
a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default,
b) the amount of loss caused to an investor or group of investors as a result of the default and
c) the repetitive nature of the default.
As regards the disproportionate gain or unfair advantage there are no quantifiable figures available with respect to the default observed on the part of the broker. There are also no figures or data to quantify the amount of loss caused to an investor or group of investors as a result of the default. Besides, there is no mention of investor complaints against the broker. However, for the default with respect to the deficiencies noted above, a token monetary penalty needs to be imposed on the broker as a corrective measure.
Keeping in view the factors as listed in Section 15 J of the said Act, the above facts and circumstances of the case, findings as recorded above and Rule 5(2) of the SEBI Rules, I am satisfied that a penalty of Rs. 10,000/- shall be commensurate in the present case.
In exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the Securities & Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose a penalty of Rs.10,000/- (Rupees Ten Thousands Only) on the broker for violation of Section 15B and 15F(a) of SEBI Act. The broker shall pay this amount of penalty of Rs.10,000/- by way of demand draft in favour of “SEBI - Penalties Remittable to Government of India" payable at Mumbai within 45 days of receipt of this order.
The said demand draft should be forwarded to the Chief General Manager of SEBI, MIRS Department (DPS- I) at SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
Date : January 31, 2005. AMARJEET SINGH
Place : Mumbai ADJUDICATING OFFICER