ADJUDICATION ORDER UNDER SUB-SECTION (1) OF RULE 5 OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 RELATING TO M/S. ARIHANT FINCAP LTD., (INB 230783938) BROKER OF NATIONAL STOCK EXCHANGE.
1. BACKGROUND
1.1 M/S.Arihant Fincap Ltd., (hereafter referred as “broker”) is a member of the National Stock Exchange, Mumbai (here after referred as “the NSE”). An inspection of the books of accounts, documents and other records maintained by the broker during the period April 1, 2001 to March 31, 2003 was conducted during May 26, 2003 to June 19, 2003, through M/s M. Munshi & Co., Chartered Accountants (hereafter referred as “inspector”) appointed by Securities and Exchange Board of India (hereinafter referred to as “SEBI”).
2. ADJUDICATION PROCEEDINGS
2.1 Based on the violations observed in the inspection report, and pursuant to the broker’s reply Whole Time Member, Shri T. M. Nagarajan, in terms of powers conferred upon him under Section 19 of the SEBI Act 1992 (hereinafter referred to as the “Act”) read with Section 15-I of the Act and Rule 3 of SEBI (Procedure for holding Inquiry and imposing Penalties by Adjudicating Officer) Rules, 1995, appointed the undersigned as the Adjudicating officer vide order dated March 10, 2004, to enquire into and adjudge the alleged violations committed by the broker as given below:
( a ) Failed to issue contract notes in the form and manner prescribed in violation of Section 15 F(a) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "Act") read with Regulation 26(v) , 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the "Regulations").
( b ) Delayed Payment of monies /delivery of securities to clients in violation of section 15HB of the act read with Regulation 26(vi) of the regulations.
( c ) Failed to collect margins in violation of Section 15HB of the Act read with Regulation 26 (xv) and (xvi)of the Regulations;
( d ) Granted trading terminals to clients in violation of Section 15HB of the act read with Regulation 26(xix) of the Regulations.
( e ) Dealt with sub brokers before registering them with SEBI in violation of section 15HB of the act, read with Regulation 26(xiv) of the Regulations.
( f ) Indulged in off the floor transactions in violation of section 15HB of the act read with Regulation 26(xv) and (xvi) of the Regulation.
( g ) Failed to comply with the directions issued by the Board in violation of Section 15HB of the Act read with Regulation 26 (xv) of the Regulations;
( h ) Not exercised due skill, care and diligence in violation of Section 15HB of the Act read with Regulation 26 (xvi) of the Regulations.
3. SHOW CAUSE NOTICE AND HEARING
A show cause notice under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995 was issued by the undersigned on November 18, 2004 to the broker to show cause as to why penalty under the provisions of Chapter VI A of SEBI Act read with Regulation 26 of SEBI (Stock Brokers & Sub-brokers) regulation should not be imposed upon him in view of the alleged violations. The broker replied vide his letter dated November 27, 2004. An opportunity for personal hearing before the undersigned was given to the broker on December 13, 2004. The broker, during the personal hearing on December 13, 2004 explained his position with respect to the findings of inspection report and the alleged violations of SEBI Regulations / Rules / Guidelines. The broker’s submission below includes his written reply as well as submission during the personal hearing.
4. REPLIES AND FINDINGS
4.1 Failed to issue contract notes in the form and manner prescribed
The contract notes are being generated by the computer system and not serially pre-numbered. It is also seen that the broker had not affixed stamps on the contract notes issued to the clients; however the stamp charges were debited in the profit and loss account of the company. The order time is not printed in the contract note.
The broker stated that the serial numbers of the contract notes were computer generated. Now this has been corrected and they are using preprinted stationary for the same. The broker submitted a copy of the preprinted contract note being issued now in support of his statement.
The broker has rectified the error with respect to usage of preprinted serial numbers in the contract notes and is now complying with regard to SEBI directions in this regard. However no comments were offered regarding not affixing of stamps in the contract notes as required by SEBI Circular No. SMD/MDP/CIR/043/96 dated August 5, 1996. Therefore, it is deduced that the broker accepted the violation.
4.2 Delayed Payment of monies /delivery of securities to clients
It was seen that in many cases pay out of funds to the clients were made only after the mandatory 48 hours prescribed by SEBI. There were 17 such instances observed in 2001-02, 15 in 2002-03 with the delay ranging from 3 days to 31 days. Also in the Ujjain branch of the broker there were 10 such instances in the year 2001-02 and 10 instances observed in 2002-03. The delay ranged upto 18 days from 3 days. All these clients were having very few transactions only with the broker.
The broker in reply to the Show Cause Notice stated that they are making payments to the clients as per NSE schedule. He added that on request / with due authority of clients they held the payments against their present / future margin requirements. The broker submitted authorisation letters from the said clients. However it is seen that the letters were not dated. When querried about this the broker replied that those letters were collected along with client registration forms which are dated. The broker further stated that they are maintaining running accounts with those clients in order to maintain margin requirements for their future businesses.
It was clearly stated that the clients, to whom the delayed payments were made, were not dealing with the broker regularly. This does not satisfy with the submitted reason for holding back payment by the broker that he was keeping it for future margin requirements. Further the authorisation letters submitted by the broker were not dated and the explanations provided in this regard were not satisfactory. Further the letters were in a very general format.
After examining the inspection report and the replies from the broker undersigned is of the opinion that the broker had violated SEBI Circulars SMD/SED/CIR/93/23321 dated 18th November 1993 and SMDRP/Policy/Cir-05/2001 dated February 01, 2001.
4.3 Failed to collect margins
The inspection report depicts that on the scrutiny of the ledger account of margin, the margin so credited by the member was only accounting entries by debiting the client/sub-broker account. There are no actual funds received by the broker towards the margin from its clients. This was done by crediting the margin at the beginning of the year by debiting the client account and that the client accounts are always in debit position through out the year. The member reverses the entry at the year end to nullify the effect at balance sheet date. This pattern was seen in the client accounts of Mukesh Jhaveri, Arzoo capital market, Madanlal Agrawal, Sunil Kumar Jain HUF, Anita Jain and Julian Capital Market.
The broker stated that since the clients were insisting to have single account at the closing of the year, at the end of the year they transfer the balance of margin account to clients trading account and again at the beginning of the next year they would debit client account for the margin amount and transfer the same to margin account.
1) According to the inspection report for the client Mukesh Jhaveri the entry for margin of Rs. 6 lacs was created by debiting the client account. The debit balance during the year was exceeding Rs.6 lacs. The entry was reversed at the year end.
The broker stated that in case of Mukesh Jhaveri the credit balance was only Rs.1.85 lacs where as the inspection report was speaking about 6 lacs.
However it is seen from the records that the amount lying as debit was Rs.6 lacs debited on 01/04/02 and transaction reversed on 31/03/03.
2) The inspection report had stated that in the account Sunil Kumar Jain HUF margin deposit of Rs.8 Lac was debited on 09/01/02 and reversed the same on 23/1/02.
The broker stated that he had received Rs.8 lacs vide cheque number 51602 dated 09/01/02 drawn on UTI Bank Ltd. The said amount was first credited to party trading account as per their usual practice. Later they had transferred the same to party margin account on 09/01/02. Thus it is not a book entry.
However, it is seen from the records that this Rs.8 lacs was credited in the clients account (i.e., reversed the transaction) on 23/1/02, as per the supporting documents given along with the inspection report, for which the broker has not given any further explanations.
3) With respect to Arzoo capital market and Madanlal Agrawal the inspection report states that Madanlal Agrawal, a sub broker to the member who is having another client account Arzoo Capital Market. It was noticed that the client was not dealing the sub broker client code rather doing main dealing through Arzoo Capital Market as un-authorised intermediaries. In the year 2001-02 a margin of Rs.5 lacs was credited in the margin account through accounting entry by debiting the client account. The client account was in debit through out the year. In the year end the entry for margin was reversed. Similarly in the year 2002-03 margins of Rs.5 Lacs were debited to the client account with a total debit balance of Rs.13.89 lacs in the client account.
The broker submitted that Madanlal Agarwal is their registered sub broker. It’s a proprietorship firm whose proprietor is Mr.Ajay Agarwal. Mr. Ajay Agarwal had changed its trade name to Arzoo Capital Markets Ltd. The requisite application is pending with SEBI. The broker submitted the copy of letters.
From the replies of the broker it is clear that the broker allowed the sub broker to use a different trade name before the authorities permitted such request. However the broker did not mention anything specifically regarding the adjustments with respect to the margin collection. The broker failed to satisfactorily explain about the margin collection.
4) It was alleged in the inspection report that in the case of the client Anita Jain, a margin deposit of Rs.10 lacs has been debited into the clients account on 09/01/02 and credited on 23/01/02.
The broker stated that they had received Rs.19.50 lacs vide Cheque No.52276 drawn of UTI Bank Ltd on 14/01/2002. The said amount was first credited to party trading account as per their usual practice. Later they had transferred the same to party margin account on 14/01/02. In view of this the broker claimed this to be not a book entry.
After considering the documents submitted in support of his claims by the broker, the undersigned is of the opinion that the broker’s view may be accepted in this regard.
5) The Report states that in the case of Julian capital market as on 01/04/2001 the member had a debit balance in client account by Rs.21.06 lacs and credit balance of Rs.18.22 lacs in client margin account. During the year the margin transferred in the client account and balance in the client account was Rs.0.26 lacs only as on 31/03/2002. This indicates that there was no actual collection of margin from the client.
The broker stated that they had received money from the party. However they failed to provide any supporting evidence.
The broker was stating that “since the clients were insisting to have single account at the closing of the year, at the end of the year we transfer the balance of margin account to clients trading account and again at the beginning of the next year again we debit client account for the margin amount and transfer the same to margin account”. How ever it is seen that for this to be true the first transaction should be at the end of one financial year and the second in the beginning of the next year. In the above discussed cases it is seen that this is not correct. The undersigned is of the opinion that the broker’s explanations are not satisfactory. Further in cases like Arzoo capital services, the broker was trying to explain that the client is a sub broker rather than clarifying about the entry.
The broker further submitted his audited balance sheet for the year ended March 31, 2003. It was shown to the undersigned that the audited report shows a margin balance of Rs.2.02 crores as against the 16 lac as margin mentioned in the inspection report. It is seen that this include the margin collected from the sub brokers.
From the examination of the inspection report and the replies from the broker it is seen that the broker has violated SEBI circular SMDRP/Policy/Cir-07/2000 dated 4/2/2000 and SMDRP/Policy/Cir-33/2000 dated July 27, 2000. It is seen that the broker violated Clause A(1) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
4.4 Granted trading terminals to clients.
As per the inspection report it was seen that the member had granted trading terminals at other than authorised locations. Seven instances were pointed out where adequate information is not available. It was also noticed that the VSAT charges of Arihant Fincap Ltd.’s Surat branch was paid by Intelligent financial services, a client. The inspection report also stated that they had collected VSAT/Terminal deposit from the un-authorised intermediaries. These intermediaries include LMS capital services, Khyati Investments, Intelligent Financial Services, R.J Securities, and Neredi Investments (P) Ltd.
The broker stated that the mentioned instances given in the inspection report are managed by the authorised representatives of the broker including family members.
The broker further stated that they had opened their branch office in Surat and the trading terminal was situated in their branch office. However Intelligent Financial services Pvt Ltd was the major client and in fact it was for his convenience that they opened the branch office there. The client had agreed to pay minimum brokerage only. However he agreed to bear the cost of the VSAT terminal as the terminal was maintained for him only. The broker stated that this was the reason why they charged VSAT charges from Intelligent Financial services Pvt Ltd.
The broker further stated that they had provided trading terminals only to authorised intermediaries. They had stated that LMS Capital services, Intelligent Financial Services, RJ Securities and Naredi Investment are authorised intermediaries and provided their SEBI registration numbers.
After the examination of the inspection report and considering the submissions by the broker the undersigned is of the opinion that the sub broker had violated various provisions of the regulation and the act. From the internal database of SEBI it was seen that these intermediaries received SEBI registration on the following dates-
LMS Capital Services 14/07/2003
Intelligent Financial Services 30/05/2003
R J Securities 18/02/2003
Naredi Investments 14/07/2003.
All these intermediaries got SEBI registration after the inspection. This means that the broker was treating these entities as sub brokers even prior to their SEBI registration. Further the broker tried to misguide the adjudication by falsely representing the information.
From the examination of the inspection report and rthe replies and submissions from the broker the undersigned is of the opinion that the broker had violated SEBI circular SMDRP/Policy/Cir/-49/2001dated 22 October 2001. It is seen that by providing inaccurate and factually wrong information to SEBI the broker has violated Clause A(1), A(2) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
4.5 Dealt with sub brokers before registering them with SEBI
The inspection reports show that the broker was dealing with unregistered sub brokers. The inspecrtion report pointed out that the following entities were operating as unregistered sub brokers.
1. Ajit Jain Securities Pvt Ltd
2. LMS Capital Services
3. Raj Securities
4. Arzoo Capital Market
5. Intelligent Financial services
6. Vision Sharecon Pvt Ltd
7. Shikha Securities
8. Ankita Securities
It was also depicted in the inspection report that a client Mr.Manoj Agarwal had been granted CTCL Terminal and from January 2002 to September 2002 on a monthly charge of Rs.3000/-.
The broker replied that Ajit Jain Securities Pvt Ltd, Vsion Sharecon P Ltd., Shikha Secuirties and Manoj Agarwal are clients of the broker at Ujjain branch. However the broker stated that these clients had sold securities of their friends and relatives in their account.
Further the broker stated that the entities- Intelligent Financial services, LMS Capital Services, Raj Securities, Arzoo Capital Market, Naredi Investments and Arvind Securities are their registered sub brokers. Further they provided the SEBI registration numbers of these entities.
However from the SEBI database it was found that the date of registration of these entities with SEBI is as follows.
1. LMS Capital Services 14/07/2003
2. Raj Securities 18/02/2003
3. Arzoo Capital Market 09/11/1998
4. Intelligent Financial services 30/05/2003
5. Arvind Securities 23/07/2002
6. Naredi Investment 14/07/2003
It was seen that the intermediaries Naredi Investments, Intelligent Financial services, Raj Securities and LMS Capital Services got SEBI registration only after the inspection. From the information available from the inspection report it is clear that the broker was dealing through these intermediaries as unregistered intermediaries. Further it is seen that the broker purposefully tried to misguide the adjudicating authority by providing factually incorrect information as during the period in question these intermediaries were unregistered. In doing so the broker tried to misguide the adjudicating authority in their reply to Show Cause Notice vide letter dated 27th November 2004.
It is observed that the broker has violated the SEBI circulars SMDRP/Policy/Cir-39/2001 dated July 18, 2001 & SMD/Policy/Cir/3-97 dated 31 March 1997. It is seen that by providing inaccurate and factually wrong information to SEBI the broker has violated Clause A(1) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
4.6 Indulged in off the floor transactions
The inspection report brings out that the member had purchased shares of Arihant Capital Market Ltd from AKJ Securities Pvt Ltd., both are associated concerns of the member.
The broker stated that the scrip is not listed and therefore can not be purchased through NSEL terminals.
It was seen that the said scrip is listed in BSE. This was an off market transaction not reported to the exchange. It is seen that the broker was trying to misguide the adjudicating authority. It is seen that by providing mis-guiding information to SEBI the broker has violated Clause A(1), A(2) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992. It is also seen that the broker has violated SEBI Circular No SMD/Policy/Circular-3/97 dated March 31, 1997 read with Clause A(5) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
5. CONCLUSION
The violations as mentioned in the Show Cause Notice pertain to the years 2001-2003, while the referred regulations for adjudications are under Regulation 26(iii), (v) (xiii), (xv) and (xvi) of Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Regulations, 1992 which were effective from November 20, 2003. Therefore the undersigned is of the opinion that the said Regulations are not applicable.
However it is seen, as discussed in the pages above, that the broker had not adhered to the Code of Conduct prescribed under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with Clause A (1), A (2), A (5) and C (6) of Code of Conduct prescribed under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 by violating the following SEBI regulations and circulars.
1. Clause A (5) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 and SEBI circular No. SEBI Circular No. SMD/MDP/CIR/043/96 dated August 5, 1996 (Para 4.1) read with Clause read with Section 15F(a) of the SEBI Act 1992.
2. Clause A (5) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with SEBI Circulars SMD/SED/CIR/93/23321 dated 18th November 1993 and SMDRP/Policy/Cir-05/2001 dated February 01, 2001 (Para 4.2) read with section 15HB of the act.
3. Clause A (5) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with SEBI Circulars SMDRP/Policy/Cir-07/2000 dated 4/2/2000 and SMDRP/Policy/Cir-33/2000 dated July 27, 2000 read with Clause A(1) A(2) and C (6) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with section 15HB of the act.
4. Clause A (5) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with SEBI circular SMDRP/Policy/Cir/-49/2001dated 22 October 2001read with Clause A (1), A(2) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
5. Clause A (5) of Code of Conduct for Stock Brokers Specified under Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations 1992 read with SEBI circular SMDRP/Policy/Cir-39/2001 dated July 18, 2001 & SMD/Policy/Cir/3-97 dated 31 March 1997 read with Clause A(1) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
6. Clause A(1), A(2) and Clause C(6) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992. It is also seen that the broker has violated SEBI Circular No SMD/Policy/Circular-3/97 dated March 31, 1997 read with Clause A(5) of code of conduct for SEBI Stock Brokers read with Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations 1992 read with Section 15HB of SEBI Act 1992.
6. ORDER
The submissions of the broker have been considered and dealt in detail as above and in view of the findings arrived at, and considering that the broker tried to misguide the adjudicating authority by providing wrong information or information that is only partly correct, I consider it to be a fit case for imposition of penalty under section 15 HB of the SEBI Act, 1992. In view of the same and 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.1,00,000/- (Rupees one lac only) on the broker M/s Arihant Fincap Ltd. The member shall pay this amount of penalty of Rs.1,00,000/- 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.
In terms of Regulation 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, a copy of this order is served on the broker and a copy is submitted to the Board.
R. Mohan
Adjudication Officer
January 13, 2005.