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. R S GUPTA & CO. (INS010704117), SUB BROKER OF JSEL SECURITIES LTD., BROKER OF THE STOCK EXCHANGE, MUMBAI (BSE).
1. BACKGROUND
1.1 M/S. R S GUPTA & CO., (hereafter referred as “sub-broker”) is a sub broker to the JSEL securities Ltd., Member of The Stock Exchange, Mumbai (here after referred as “the BSE”). An inspection of the books of accounts, documents and other records maintained by the sub-broker during the period April 1, 2001 to May 12, 2003 was conducted during June 2003, through M/s S. Tholia & 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 sub-broker’s reply the Whole Time Member, Shri T. M. Nagarajan, in terms of the powers conferred upon him under Section19 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 sub broker as given below:
a) Not maintained order book, Document Register, Margin Deposit Book in violation of Section 15 HB of Securities and Exchange Board of India Act 1992 hereinafter referred to as “Act”) read with regulation 26(iii), 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”).
b) Not issued confirmation memos in the form and manner prescribed in violation of Section 15F(a) of the Act read with Regulation 26(v) and 26(xv) of the Regulations.
c) Failed to collect margins in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
d) 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.
e) Failed to maintain client database in violation of Section 15HB of the Act read with Regulation 26(xv) of the Regulations.
f) Granted trading terminals at unauthorised locations in violation of Section 15HB of the Act read with Regulation 26(xix) of the Regulations.
g) Not adhered/ allotted the unique client code in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
h) Failed to comply with directions issued by the board in violation of section 15 HB of the act read with Regulation 26 (xv) of the Regulations.
i) 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 September 20, 2004 to the sub broker to show cause as to why penalty under the provisions of Chapter VI A of SEBI Act 1992, read with Regulation 26 of SEBI (Stock Brokers & Sub-brokers) regulation 1992 read with Rule 4 of SEBI (Procedure for holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 should not be imposed upon him in view of the alleged violations. The sub broker submitted his written reply to the show cause notice vide their letter dated November 08, 2004. An opportunity for personal hearing before the undersigned was given to the sub broker on December 8, 2004. The sub broker, during the personal hearing explained his position with respect to the findings of inspection report and the alleged violations of SEBI Regulations / Rules / Guidelines and further submitted supporting documents to his claims. The sub broker’s submission below includes his written reply as well as submission during the personal hearing.
4. REPLIES AND FINDINGS
4.1 Not maintained order book, Document Register and Margin Deposit Book:
The sub broker stated in his reply to the Show Cause Notice that the order book is maintained online by the BOLT system in which as soon as an order is punched, modified or cancelled it is automatically saved in a file named orddmmyyexe.tws. With regard to the documents register, the sub broker stated that it is maintained in computer as well as manually. He had also produced registers in support of his claims during the hearing.
With respect to the margin deposit book, the sub broker stated that it is maintained in the computer. The cash margins are reflected in client’s ledger account as well as in margin account. He also stated that the securities margin shows the value of securities calculated by computer at previous day’s closing price. The sub broker also submitted copies of the margin account and client wise margin balance as supporting documents.
After examining the inspection report and replies from the sub broker the undersigned is of the opinion that the margin deposit book and order book as well as the document registers were maintained either in physical or softcopy form.
4.2 Not issued confirmation memos in the form and manner prescribed:
a) Jurisdiction stated as Jaipur instead of Mumbai.
b) Name of authorised signatory not given
c) Name of person signing the confirmation memo not written
d) Order time is not mentioned on confirmation memo
e) Sub broker’s note stamp are not affixed on confirmation memo
f) Confirmation memo are not issued to the clients within 24 hours.
g) Computer generated memo’s but numbering either in annual basis /financial basis.
h) No pre-printed memo’s
i) No dated acknowledgements
The sub broker in his reply to the department had stated that they were using accounting software which provided for printing in plain paper only. Further the sub broker accepted that there are some discrepancies like Jurisdiction, name, name of the authorised signatory, and numbering system which have been rectified. The sub broker also claimed that the entire confirmation notes were duly acknowledged by the clients. He accepted that the confirmation notes are printed on the plain paper. He also confirmed that the pre-printed stationery were not introduced due to ambiguity during the period regarding the authority of sub brokers to issue confirmation memos and contract notes. He further submitted that the necessary up gradation in the software is already done and preprinted stationary will be introduced at the earliest.
It is seen from the inspection report and subsequent replies from the sub broker that the sub broker had failed to issue confirmation memos in the form and manner prescribed. However the sub broker has already rectified the discrepancies except that of use of preprinted stationary for printing the confirmation memos which is also being rectified.
4.3 Failed to collect margins:
It was observed in the inspection report that the debit balances pertaining to some clients are matched with credit balance of other clients to maintain the margin money requirement without expressive authorisation.
Sub broker said all such instances belong to family group and for the same authorisation letters are available with them and the same were produced. It was observed that the authorization letters produced before the undersigned were not dated. There were no mention about the specific transactions/ adjustments to be made or to which account the adjustments are to be made.
It is seen that the sub broker was adjusting the debit balances of certain client accounts with credit balances of other clients towards the margin money requirements. However, the total margin requirements as well as the margin under the disposal of the sub broker were matching. But it is seen that no specific authorization letters authorizing the sub broker to adjust the debit/credit positions with specific accounts were not available. The letters produced by the sub broker was in fact generic authorization collected along with the client registration form.
After examining the inspection report, replies from the sub broker and the documents submitted, the undersigned is the opinion that the sub broker had not took sufficient authorization before adjusting the debit balance of some the clients towards the credit balances of some of the other clients. The authorisation letters submitted were inadequate for the said purpose as it even failed to bring out to whose account the client was authorizing the sub broker to adjust his /her debit/credit balances. It is seen that the sub broker had violated SEBI circular no. SMDRP/Policy/Cir-35/98 dated December 11, 1998.
4.4 Delayed payment of monies/delivery of securities to clients:
There were 10 cases of delayed payment of money and 6 cases of delayed payment of security by the sub broker.
The sub broker stated that he had the authorisation letters from the clients authorizing him for retaining their securities as well as monies towards their future transaction and produced copies of the same. However the letters were not dated and its genuinity could not be evaluated. In the personal hearing the broker stated that the letters were collected along with the client registration forms.
After examining the Inspection report and the replies from the sub broker, undersigned is of the opinion that while the sub broker had collected authorization letters from his clients, it was not specific to the said transactions. In effect the sub broker failed to comply with the SEBI Circulars SMD/SED/Cir/93-23321 dated November 19, 1993 and SMDRP/Policy/Circular-05/2001 dated February 1, 2001.
4.5 Failed to maintain client database:
Discrepancies like no photo identity, no demat a/c number, pan number, bank details etc observed in as high as 206 cases.
However, the sub broker claimed that they are maintaining the complete client data base in the computer without which no client can enter into the transactions. The clients are registered with BSE online and no transaction was executed without client registration. In the personal hearing the sub broker submitted that few of the registers along with supporting documents were under the possession of the broker JSEL, during the period of inspection. The documents were not called for by the inspecting authority and therefore they were not produced during the inspection. The sub broker produced the original documents before the undersigned during personal hearing.
After analyzing the inspection report, replies of the sub broker and documents produced during personal hearing the under signed is of the opinion that the sub broker was maintaining client database in proper form.
4.6 Granted trading terminals at unauthorised locations:
It was alleged in the inspection report that the sub broker had not informed the authorities in the changes in the address of its branches and there by using the trading terminals at places other than the authorised locations.
However the sub broker produced a copy of broker / sub broker agreement in which the present address is given as registered address. He further stated that the trading terminals are run through V-Sat for which permission was obtained from BSE through JSEL Securities Limited and was installed by BSE. He produced the telephone bills, documents showing payment of V Sat charges and copy of V Sat installation as supporting documents. The sub broker further stated that the new office is situated in JSE building which was allotted by the Jaipur Stock Exchange with the knowledge of JSEL Securities Ltd., the broker.
From the replies of the sub broker, and as per the material evidences submitted in support of his claims it is seen that the sub broker had not violated the provisions regarding the granting and subsequent usage of trading terminals.
4.7 Not adhered to the unique client code:
a) One client was given 6 client codes.
The sub broker stated that the client, Ashok Bohra (client who was issued 6 IDs) was an astute follower of astrology and numerology. Based on his beliefs he asked for issue of new account numbers. However at a time, he was not permitted to use more than one account/client code i.e. the balances of his previous account were carried forward to the new account. The ledger details showing these transactions were produced by the sub broker as supporting document.
It is seen that the sub broker had given more than one client id to a specific client, though the client had not used more than one id at a time for dealing in the market. This is a practice to be avoided as it may cause avoidance of identity trail of the clients.
b) The sub broker had not sent the information pertaining to many of its clients to the broker. (216 cases)
The sub broker stated that he had sent all the information to broker JSEL. They have produced a circular of JSEL dated April 17, 2003 in this regard. He further stated that later this circular was reversed and started collecting the quarterly certificates from the sub broker (relating to client registration and collection of margin). Supporting documents were produced by the sub broker.
From the replies of the sub broker it is seen that there was no intentional violation from the part of the sub broker. The omission had occurred as part of the changed BSE directives where by the quarterly certificate system relating to client registration was introduced. Further it is seen that the sub broker was in compliance with quarterly certificate requirements.
5. CONCLUSION
The violations as mentioned 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) (vi) (xii) (xv) (xvi) and (xix) 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 to the extent period of occurrence.
In the light of the above, after considering the non applicability of the Regulation Regulation 26 (iii) (v) (vi) (xii) (xv) (xvi) and (xix) of Securities and Exchange Board of India (Stock Brokers & Sub-Brokers) Regulations, 1992, the undersigned is of the view that penalties as mentioned in Section 15 HB of SEBI Act, 1992 are not leviable against the sub broker for the aforementioned violations. However in view of the violations as discussed above, the department may consider any other suitable action.
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 sub broker and a copy is submitted to the Board.
Adjudication Officer
January 4, 2005.