ORDER

 

UNDER THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES, 1995

 

AGAINST

 

M/S CHOTANI GROWTH & INVESTMENT LIMITED.

 

 

BACKGROUND:

 

 

 2. An inspection of the books of account, documents and other records of CGIL was conducted by SEBI for the financial years 2001-02 and 2002-03. During the inspection, CGIL were alleged to have committed certain irregularities and violations of the SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). While communicating the findings of inspection to CGIL vide letter dated November 25,2003, SEBI also advised them to submit their comments to the same. As CGIL did not respond to the said notice, a reminder dated March 10, 2004 was sent to CGIL with an advice to respond to the said notice failing which appropriate action would be initiated against them. CGIL responded to the letter of SEBI dated November 25,2003 vide their letter dated March 5,2004, in which while admitting to the charges leveled against them, they further submitted that corrective actions were being initiated by them. As the response of CGIL was found to be unsatisfactory, I was appointed as the Adjudicating Officer, vide order of SEBI dated February 25, 2005 to inquire into and adjudge the alleged acts of omissions and commissions of CGIL.

 

 NOTICE/ REPLY/ PERSONAL HEARING:

 

1. Accordingly, I issued a notice dated June, 17, 2005 to CGIL under Rule 4 of the SEBI (Procedure for holding inquiry and imposing penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the ‘Rules’) whereby CGIL was called upon to show cause as to why action should not be initiated against them for the violations referred to in the said notice. CGIL was also advised to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and also indicate whether they were desirous of a personal hearing. CGIL were further advised to note that in case they failed to reply within the stipulated period, it would be presumed that they had no adequate explanation to offer and that the matter would be decided solely on the basis of the material available on record.
   
   
2. Vide letter dated June 30, 2005, CGIL reiterated the contentions advanced earlier and requested for a personal hearing. Thereafter a notice of hearing dated July 5, 2005 was issued to CGIL to appear before me on July 18, 2005. Shri Pankaj Chottani, Director, CGIL along with Mr Harshad Rathod Accounts in charge appeared for the personal hearing on the said date and while reiterating their submissions made earlier, agreed to all the charges leveled against them. They however stated that they were trying their best to rectify the various irregularities earlier committed and consequently their volumes had drastically declined, such that as on date their business was only 20% of what it was during the years 2001-2002 and 2002-2003. They however agreed that there were no documents to substantiate their contentions.

  

  APPRECIATION OF EVIDENCE

 

1. I have considered the facts and circumstances of the case, the material available on record and have analyzed the findings of the inspection report in the context of the contentions advanced on behalf of CGIL.

 

 6. The charges leveled against CGIL for which the present proceedings have been initiated, the submissions, if any, made by them in this regard in their defense, along with my findings thereon are elaborated herein below: -

 

 I. Deficiencies in the client registration and member-client

 agreements

a)                 Failure to obtain the client registration forms for some of the clients.

b)                 Failure to obtain some of the clients residence proof, income tax proofs, Pan number details of the clients who had executed trades above 1 lakh. etc.

c)                  Failure to obtain the client registration forms for some of the clients, prior to execution of trades.

d)                 Failure to obtain member client agreements for some of the clients and for some, obtaining the agreements only after executing trades on their behalf.

e)                 Incomplete agreements in some of the cases.

 

 7. These deficiencies are as shown in the tables below: -

(a) DETAILS OF THE CLIENT REGISTRATION FORM FOR INDIVIDUAL CLIENTS

 

Sr.No.	Name of the client	Whether client Regn. Form available	Whether residence proof available	Whether income tax proof available	Whether agreement acquired before executing trade on behalf of the client
1	Rashi Investments	Yes	No	No	No
2.	Harshad B Vakharia	Yes	Yes	NO	NO
3.	Ramesh Sanchala	NO	NO	NO	NO
4.	Gulshan B Papneja	NO	NO	NO	NO
5.	Mr.Kailash Bhagwat	NO	NO	NO	NO
6.	Royal Consultant	NO	NO	NO	NO
7.	Satish Agarwal	NO	NO	NO	NO
8.	Mohini Sangtani	NO	NO	NO	NO
9.	Mr.Sanjay N.Pansare	NO	NO	NO	NO
10.	Prakash Hariram Kukreja	NO	NO	NO	NO
11.	Rishi Mehra	YES	NO	NO	NO
12.	B S P Securities	NO	NO	NO	NO
13.	Mrs.Nalini K Joshi	YES	YES	NO	NO
14	R.K.Manchanda-HUF	NO	NO	NO	NO
15.	Bhavini A.Popat	YES	YES	NO	NO
16.	Shantabai S Punjani	NO	NO	NO	NO
17.	Suraj Pai	NO	NO	NO	NO
18.	Mrs.Mona K Joshi	YES	YES	NO	NO
19.	Vijay Dhogle	NO	NO	NO	NO
20.	Rajesh Mehta	NO	NO	NO	NO
21.	Rekha Powani	NO	NO	NO	NO
22.	Sanjay K Gureja	NO	NO	NO	NO
23.	Pankaj Chothani & Associates	YES	YES	YES	NO
24.	Anil Sharma	NO	NO	NO	NO
25.	Dinesh Nair	NO	NO	NO	NO
26.	Leela Krishnan Nair	NO	NO	NO	NO
27.	Malti N Punjani	NO	NO	NO	NO
28.	Rajen Shah	NO	NO	NO	NO
29.	Indur Kirpalani	YES	YES	NO	NO
30.	Kshitij Joshi	YES	YES	NO	NO
31	Pankaj Chothani	NO	NO	NO	NO
32	Dipesh Shah	NO	NO	NO	NO
33	Sai Securities	NO	NO	NO	NO
34	Mr.Pandu Naig	NO	NO	NO	NO
35	Ramesh Ahuja	NO	NO	NO	NO
36	Rajnish Khanna	NO	NO	NO	NO
37	Amitbhai Shah	NO	NO	NO	NO
38	Venu Krishnan	NO	NO	NO	NO
39	Devendra P Chothani	NO	NO	NO	NO
40	Kirit Patel	NO	NO	NO	NO
41	Poonam S Agarwal	NO	NO	NO	NO
42	Satpal Agarwal	NO	NO	NO	NO
43	Manish Asher	NO	NO	NO	NO
44	Harshad Rathod	NO	NO	NO	NO
45	Omprakash Marwah	NO	NO	NO	NO
46	Hemendra R Sheth	NO	NO	NO	NO

 

  

(b) Details of client registration Form for non individual clients

 

 

Name of Client	Whether Client  Registration Form Available	Whe Ther Income Tax Proof Available	Whether Memorandum/Articles or Partner- -ship Deep Available	Whether three years annual reports availa- ble	Whe- ther Anne- xure ‘A’ of Direc- tors availa- ble.	Whether Residence proof of Directorsavailable	Whether Income Tax Proof of Directors' available	Whether AGR Acquired before Executing trade on behalf of the client
NETWORTH EQUILINE P LTD	YES	NO	NO	NO	NO	NO	NO	NO
CHOTHANI FIBRES P LTD	YES	YES	YES	YES	NO	NO	NO	NO
VKN INVESTMENTS P LTD	YES	NO	NO	NO	NO	NO	NO	NO
LVK INVESTMNETS P LTD	NO	NO	NO	NO	NO	NO	NO	NO
LEELA INTERNATIONAL P LTD	YES	NO	NO	NO	NO	NO	NO	NO
ASHAR'S HOLDING P LTD	NO	NO	NO	NO	NO	NO	NO	NO

 

 

8. These deficiencies as brought out above were found to amount to a violation of Regulation 26(xii), 26(xv) and 26(xvi) of the Broker Regulations read with SEBI Circulars No.SMD/Policy/Circular-11/97 dated May 21, 1997, SMD/Policy/IECG/1-97 dated February 11, 1997 and SMD/policy/circulars/5-97 dated April 11, 1997.

 

 9. In their reply, CGIL agreed to all the charges. They however attributed these deficiencies to their negligence and stated that some of their clients had done only one or two transactions in a year and hence CGIL had not collected the client registration forms from them. CGIL however stated that these forms were now being collected from each and every client.

 

 10. Regulation 26 (xii) of the Brokers Regulations, inter alia provides that a stock broker or a sub-broker shall be liable for monetary penalty where trades are executed without entering into an agreement with the client under the Act, rules or regulations framed there under or in case of a failure to maintain client registration form or commission of any irregularities in the maintenance of such a client agreement.

 

 11. Furthermore, SEBI vide its Circular no. SMD/POLICY/IECG/1-97 dated February 11, 1997 had also advised all the stock exchanges to introduce the concept of “know your client” and asked the member-brokers to maintain the database of their clients. In continuation with the same, vide Circular No SMD/POLICY/CIR /5-1997 dated April 11,1997, SEBI forwarded the clients’ registration form and broker-client agreement form to the stock exchange. In terms of the said circular, it was the responsibility of the broker to provide for the clients’ details as and when the need arose. Further all the stock exchanges were advised to implement the above with immediate effect and complete the client-registration before May 31, 1997.

 

12  Due note has to be made as regards the very purpose of issuing these circulars of SEBI as well as the rationale behind their issuance. Obtaining the details of the clients is the first and foremost step towards entering into the broker/sub-broker-client relationship. As is apparent from the terms of the circular, it is the responsibility of the broker to provide for the clients’ details as and when the need arises. This enables the broker to know the details/credibility of the client, before dealing with him. Client identification is also important since it makes it easier for the audit trail to identify the clients with details such as PAN number, introduction or any other identity proof etc. which would enable the verification of the credentials of the clients. The essence of obtaining client details in the ‘Know your client’ forms is a step towards the safety involved in dealings by the brokers on behalf of clients such that even if the clients become defaulters in making payments on the trades executed on their behalf, they become easily traceable on account of the details available with the broker Hence, failure to obtain the client registration forms and maintain them in the manner prescribed or failure to obtain and maintain the member-client agreement in the manner prescribed amounts to a violation of Regulation 26 (xii) of the Brokers Regulations.

 

13.  As regards the member-client agreements, they play an important role to ensure the smooth and proper functioning of various entities in the securities market, in that they provide for provisions relating to keeping the money of the clients separately, to protect the interest of the investors. The investors in turn come to know of such rights, inter alia, by executing such agreements. Entering into member client agreement after obtaining the client details is an important aspect of any broker client relationship and ensures the fact that all professional dealings that are carried out are affected in a prompt, efficient and cost effective manner, which ultimately has a bearing on the interests of the investors. In fact only after entering into such contractual agreements can a broker trade on behalf of the client. It is therefore imperative that all documentation relevant to the client should be maintained properly at the broker’s end. Non-maintenance of client agreement forms thus is a clear violation of Regulation 26(xii) of the Broker Regulations read with the SEBI Circular No. SMD/Policy/Circular-11/97 dated May 21, 1997.

 

14. During the course of the personal hearing before me and in their earlier cited replies, CGIL have admitted the lapses as stated above, but also claimed that the same were rectified. However, it is difficult to accept their contention in the absence of any documentary evidence to support the same. CGIL have also stated that some of their clients had done only one or two transactions in a year and hence the client registration forms had not been collected from them. However client details should be obtained and agreements should be executed before entering into trades on behalf of clients. This requirement does not become optional merely because a client may have only a few trades.

 

15. This failure on the part of CGIL in not obtaining / maintaining client registration forms and member client agreements in the prescribed manner adds to their failure in not exercising due care and diligence while executing trades for their clients and hence calls for a penalty.

 

 II. Irregularities in the issuance of confirmation memos

 

i. Confirmation memos were not issued to some of their clients.

ii Confirmation memos issued to some of the clients were issued after 24 hours.

iii. In some cases, the confirmation memos were not acknowledged by the clients.

iv. The Pan account number of CGIL was not mentioned in the confirmation memos for the trades above Rs.1 lakh.

v. Names of some of the clients were not mentioned properly on the confirmation memos.

 

 

These irregularities were found to amount to a violation of Regulations 26(xv) and 26(xvi) of the Broker Regulations.

 

16. In their reply, CGIL however submitted that some of their clients had given written instructions for the confirmation memos to be sent to them on a weekly basis and that they had retained the acknowledgement copy of the same. CGIL further stated that most of the clients had PAN numbers, which were mentioned in the client agreement forms and that in a few cases, although the clients had applied for the PAN number, they had yet to receive it. It was stated that they were presently taking care to mention PAN numbers on the confirmation memos issued by them.

 

17. In this context I consider it relevant to refer to Clause B(6) of Regulation 15 as specified in Schedule II of the Broker Regulations as it is existed prior to its amendment on September 23, 2003 which reads as under:

 

“Fairness to Clients: A Sub broker, when dealing with a client, shall disclose that he is acting as an agent and shall issue appropriate purchase/sale note ensuring at the same time, that no conflict of interest arises between him and the client. In the event of a conflict of interest, he shall inform the client accordingly and shall not seek to gain a direct or indirect personal advantage from the situation and shall not consider client’s interest inferior to his own.”

 

18. Thus, up to September 23, 2003, all sub brokers were inter alia required to obtain the acknowledgments bearing appropriate dates from the clients which evidenced the confirmation memos being issued within 24 hours of the execution of the trade, as the absence of the dates made it difficult to judge whether the same were issued within 24 hours as is required under the Circulars.

 

19. Subsequently, SEBI Circular No. SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004 was introduced and Annexure 3 of the said circular reads as under: 

“The stock broker shall issue, individually for each client of his sub broker, contract notes in the format prescribed by the relevant stock exchange. The sub-broker shall render necessary assistance to his client in obtaining the contract note from the stock broker”.

20. Vide the circular dated August 26, 2004, SEBI had inter alia prescribed a model format of the tripartite agreement between the broker, sub-broker and client. The requirement relating to tripartite agreement was to come into effect from December 01, 2004, which was extended upto January 01, 2005 vide SEBI circular reference number SEBI/MRD/DOPS/Cir-41/2004 dated November 25, 2004 and further extended to April 01, 2005 vide Circular No. SEBI/MRD/DOPS/CIR-44/2004 dated December 29, 2004. Vide SEBI Circular SEBI/MRD/DOPS/CIR-09/2005 dated March 31, 2005, it was further confirmed that the requirements of the earlier cited Regulations (i.e., post amendment on September 23, 2003), relating to changes in the role of sub-brokers and their main brokers, including the format of the Model Tripartite Agreement specified by the above circulars, were required to be implemented strictly from April 1, 2005.

21. Further, vide SEBI Circular No. SEBI/MRD/DOPS/CIR-11/2005 dated May 12, 2005, the subsidiaries to the registered stock exchanges who are registered as stock brokers and their registered sub brokers were also required to comply with the provisions of amended Broker Regulations w.e.f. June 01, 2005.

22. Thus, effective from the date of issuance of the Circular dated August 26, 2004, sub brokers are no longer required to issue the necessary confirmation memos and vide SEBI Circular No. SEBI/MRD/DOPS/CIR-44/2004 dated December 24, 2004, the requirement to comply with the Circular dated August 26, 2004 was extended to April 1, 2005 and vide Circular No. SEBI/MRD/DOPS/CIR-11/2005 dated May 12, 2005, the requirement to comply with the Circular dated August 26, 2004 for sub brokers of the subsidiaries was effective from June 1, 2005.

 23. Thus after the issuance of the said circulars, the obligation of issuing the purchase/sale notes by the sub brokers was undone w.e.f. April 01, 2005 for sub brokers and for the sub brokers of the subsidiaries, the same requirement came into effect from June 01, 2005.

24. Notwithstanding these developments, it is apparent that as on the date of commission of the offence, there was a mandate to issue the necessary confirmation memos which contained details as required i.e. preprinted serial numbers and date of acknowledgement on the duplicate copies of the confirmation memo.

25. Not withstanding the contentions advanced by CGIL, I am of the opinion that wherever a specific mode of transacting with clients has been specified by SEBI, the same should be strictly adhered to and there should not be any deviation from the same. In fact when the prescribed procedure or the details as indicated in the prescribed format are not mentioned, there is a scope of off market deals happening. It would also be relevant to state the contention of CGIL that they were presently taking care to mention the PAN number. However no documentary evidence to substantiate their contention was submitted. In the absence of any evidence submitted in this regard, although I am inclined to hold that CGIL did not adhere to the relevant rules and should be penalized for the same, in view of the discussion above, as the subject matter is entirely academic today, no adverse view is taken on this count.

 

III. Failure to obtain margins from clients.

 

26. CGIL were found to have failed to collect adequate margins from some of the clients as brought out below, which act amounted to a violation of Regulations 26(xv) and 26(xvi) of the Broker Regulations read with the provisions of the SEBI Circular Nos. SMDRP/POLICY/Cir-07/2000 dated February 4, 2000 and SMD/Policy/Cir-12/2002 dated May 17, 2002.

 

 

SR. NO.	NAME OF THE CLIENT
1.	RASHI INVESTMENTS
2.	SAI SECURITIES
3.	CHOTHANI FIBRES PVT LTD
4.	NETWORTH EQUILINE PVT LTD
5.	MR. PANDU NAIG
6.	VKN INVESTMENTS PVT LTD
7.	MOHINI SANGTANI
8.	INDUR KIRPLANI
9.	R.K. MNCHANDA – HUF
10.	HARSHAD B VAKHARIA
11.	RAMESH AHUJA
12.	RAJNISH KHANNA
13.	RAMESH SANCHALA
14.	ROYAL CONSULTANTS
15.	PRAKASH HARIRAM KUKREJA
16.	LEELA INTERNATIONAL PVT LTD
17.	ANIL SHARMA
18.	MR. DINESH NAIR
19.	MRS. LEELA KRISHANAN NAIR
20.	LVK INVESTMENTS PVT LTD
21.	MR. SANJAY N. PANSARE
22.	MR. RISHI MEHRA
23.	BHAVINI A POPAT
24.	HENENDRA R. SHETH

 

 

27. When confronted with this charge, CGIL agreed to not collecting the initial margin from some of the clients out of greed to obtain more business and further admitted understanding the risk factor involved for the same but stated that they had tried to over come the problem by restricting such an activity which had however resulted in their business suffering considerably. CGIL contended that since they were entertaining such clients who were financially weak and the margin was not collected, they had tried to be safe during such period by holding their stocks and charging them the interest over the same. CGIL however stated that presently they had totally discouraged such activities and had stopped entertaining such clients.

 

28. Collection of margins is a risk containment measure in that, in case of default by the client in making the payments on the settlement of the trades, the same is met with the security deposit, collected in the form of margins. Upfront margins are required to be collected, keeping in mind the exposure provided to the clients. The more the exposure, the more the margin collected which acts as a safe deposit for the brokers, for settlement of trades.

 

29. In this regard it would be relevant to consider SEBI Circular no. SMDRP/POLICY/Cir-07/2000 dated February 4, 2000, which provides that Rs.1,00,000/- is the amount of margin, beyond which the member brokers would have to mandatorily collect margins in respect of the client in a settlement. Thus in all cases, where the margin in respect of a client in a settlement, would work out to be more than Rs.1,00,000/-, the member brokers were mandatorily required to collect margins from their clients. Subsequently, vide SEBI Circular No. SMD/Policy/Cir-12/2002 dated May 17, 2002, it was decided that for the collection of 10% upfront margin from the clients, only trades which would result in a margin of Rs.50,000/- or more should be considered. In other words, if the position of the client exceeded Rs.5 lakhs, the broker was required to necessarily collect 10% upfront margin from the clients.

 

30. Although no specific details as against CGIL have been submitted before me, viz; trade details or the corresponding debit balances of the respective clients, on the basis of the instances of default on the part of CGIL as discerned from a test check of the margin collection of CGIL, and taking into consideration the submissions advanced by CGIL admitting to their default, I am of the opinion that this default on the part of CGIL calls for a suitable penalty to be imposed upon CGIL.

 

IV Funds borrowing/lending activities

 

 31.  Certain instances were noted where money due from the clients was not received by CGIL and yet further trades on behalf of the clients were executed by CGIL indicating that CGIL had funded the clients which activity was found to amount to a violation of Regulation 26(xv) of the Broker Regulations

 

32. No submissions were advanced on behalf of CGIL to counter the said charge.  In this context, it is relevant to refer to SEBI Circular SMD/POLICY/CIR-6//97 dated May 07, 1997 which inter alia provides that borrowing and lending of funds, by a trading member, in connection with or incidental to or consequential upon the securities business, would not be disqualified under Rule 8(1)(f) and 8(3)(f) of the Securities Contract (Regulation) Rules, 1957 which inter alia provides that no person shall be eligible to be elected as a member or eligible to continue as such, if already elected if he is engaged as a principal or employee in any business other than that of securities or so engages except as a broker or an agent, not involving any personal financial liability.

 

33. Once again I have not noted specific instances of default by CGIL in the inspection report on this count. Yet taking into consideration the submissions advanced by them and their omnibus admission of guilt on all counts, it would appear that CGIL have indeed failed to exercise the necessary skill, care and diligence required as that of a sub broker and hence would be liable for action under Regulation 26(xv) of the Broker Regulations.

 

V. Failure to pay funds / deliver shares :

 

34. CGIL were found in some instances to have failed to deliver securities of their clients without obtaining the written consent from them, which amounted to a violation of Regulations 26(xvi) and 26(xx) of the Broker Regulations.

 

 35. However when confronted with these charges, CGIL stated that they had kept the payout of funds of the clients with themselves for further pay-in and similarly they had also kept the securities received for further pay in, so as to avoid both parties bearing the demat charges for transferring securities in every pay-in. CGIL further stated that these clients had issued to them the written consent to hold on their securities and settle them through their account, once again to avoid the demat charges, unwanted auction charges etc and that if they did not cooperate with the clients, despite their insistence, they would loose the business. However CGIL did not provide any proof to substantiate their contention.

 

36. I have considered the submissions of CGIL and am of the considered opinion that even if their contention that securities of the clients were retained at their end for the convenience of the clients be considered, there is a danger of the same being made a general practice which would amount to a violation of the Regulation 26(vi) of the Broker Regulations which inter alia provides for imposition of monetary payment in case of a failure on the part of the broker to deliver any security or make payment of the amount due to the investor within 48 hours of the settlement of trade, unless the client has agreed in writing otherwise. The mandate to deliver any security or make payment of the amount due to the investor within 48 hours of the settlement of trade unless the client has agreed in writing otherwise is also provided for in terms of SEBI Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993.

 

37. One of the conditions for grant of certificate of registration to a broker is that the said entity should abide by the requirements of the SEBI Act and the rules and regulations framed there under. In terms of clause B (1) of the Code of Conduct of the Broker Regulations, a stock broker/sub-broker is required to make prompt payment in respect of securities sold and also arrange for the prompt delivery of securities purchased by the clients.

 

38. The inspection report findings clearly indicate that CGIL apparently failed to adhere to the system of payment of outstanding to their clients within 48 hours of payout, without the necessary authorization, which thus amounts to a violation of the above referred to provisions of the Broker Regulations. However CGIL have disputed these findings but have not produced/maintained the consent letters for the concerned clients, allegedly obtained from some clients.

 

39. However the inspection report has failed to point out specific instances on the alleged default. CGIL on their part have vehemently maintained due compliance of the same, but have not furnished documentary evidence to this effect. In view of them admitting to their earlier lapses but disputing the findings of inspection on this count, CGIL may be given the benefit of doubt on this charge.

 

VI. Irregularities in assigning unique client codes

40.      CGIL were found to have assigned more than one client code to

 some of their clients as listed below

 

 DETAILS OF DUPLICATION OF UNIQUE CLIENT CODE

 

Sr.No.	Name of the Client	Unique Client Code
1.	Harshad B Vakharia	0072 0017 0071
2.	Chothani Fibres Pvt Ltd	0045 0001
3.	Pankaj Chothani & Associated	0002 0091

 

41. Other instances were also noted where there was found to be a difference in the client codes entered in NEAT system of NSE and the back office software of CGIL as listed below which amounted to a violation of Regulation 26(xv) and 26(xvi) of the Broker Regulations read with SEBI Circular No. SMDRP/POLICY/CIR-39/2001 dated July 18, 2001.

Details of difference in clients codes

 

 

Sr.No.	Name of the Scrip	Quantity	Code entered in the neat system	Code appears in the back office software	Settlement No.	Date of the Trade
1.	Bharti Tele	250	0001	0033		25.03.2003
2.	Bharti Tele	100	0001	0033		25.03.2003
3	Bharti Tele	100	0001	0033		25.03.2003
4	Bharti Tele	50	0001	0033		25.03.2003
5	McDowell	1	0001	0033		25.03.2003
6	Hotel Leela	50	000	0009		27.02.2003
7	Hotel Leela	50	000	0009		27.02.2003

 

42. While expressing regret for these errors, CGIL in their defense stated that they had assigned unique client codes to all clients but agreed that in some cases they had given more than one unique client code to one client and that they were now assigning only one code for one client. However no proof was submitted by CGIL to substantiate their contention

 

43. This act of CGIL in assigning more than one client code per client, defeats the entire purpose of having the Unique Client Code System. Their acceptance of their lapse makes it clear that they have not adhered to SEBI Circular SMDRP/Policy/CIR-39/2001 dated July 18, 2001 according to which “……..it is mandatory for all brokers to use unique client codes for all clients…………” and thus a failure on the part of CGIL to exercise the necessary due diligence required of that of a broker resulting in the violation of Regulations 26(xv) and 26(xvi) of the Broker Regulations.

 

44. From the elaborate discussion above, it is apparent that there have been instances galore of a lack of exercise of necessary care and diligence on the part of CGIL in that almost all charges levied upon CGIL stand established. However I have noted an important finding in the inspection report that needs to be highlighted i.e. the fact that there were no investor complaints pending against CGIL or a case of mis-utilisation of funds against them. Hence an appropriate penalty as prescribed needs to be levied upon them. In this regard, the relevant provisions of the Act may be perused which read as under:

 

  Section 15B: - Penalty for failure by any person to enter into agreement with clients: 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 an 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 15HB: Penalty for contraventions, where no separate penalty has been provided: Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

45. As mentioned earlier, since almost all the charges framed against CGIL are established, they would be liable for a penalty as provided under the provisions of law quoted above. However before fixing the quantum of penalty that is commensurate with all the charges leveled and established against CGIL, it would be necessary to also refer to certain factors as enumerated under Section 15J of the Act, that need to be taken into account while adjudging the quantum of penalty. These factors include the amount of disproportionate gain or unfair advantage made as a result of the said default, the amount of loss caused to the investors and the repetitive nature of default. Thus it is clear that the adjudicating officer is required to have due regard to the factors stated in the section. The same is a direction and not an option, which is however to be exercised with due regard to his discretion to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing of all the relevant material available on record especially in the case of failure to perform statutory obligations.

46. From the facts on record, it is not clear as to whether CGIL would have enjoyed any gain or unfair advantage as a result of their defaults. However it cannot be denied that any evasion of the regulatory provisions issued by the regulator in the interests of the investors or non adherence to the same for any reasons whatsoever is bound to affect the interests of such investors and deprive the general public and the investor class as a whole, of a fair and regulated market. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose behind their enactment. The very purpose of enacting any legislation is due adherence to the procedures laid down there under to ensure the sound and smooth functioning of the capital market. If no cognizance were to be taken of any breach of these provisions and no liability fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant.

47. CGIL have impressed upon me the fact that they were trying their best to rectify the defects discussed above and that their volumes had drastically declined such that as on date their business was only 20% of what it was during the year 2001-2002 and 2002-2003 and that their turnover was only to the tune of Rs 5-6 lacs. They requested that these factors be considered at the time of levy of any penalty. I have however noted that CGIL have not produced any proof of these submissions.

   PENALTY

48.Bearing in mind these facts and circumstances of the case as also the factors enumerated in Section 15J of the Act, on a judicious exercise of the discretion conferred upon me, considering the offences in its entirety and the mitigating factors as discussed above, I am inclined to hold that the penalty need not be imposed strictly as per the quantum specified in Section 15B and Section 15 HB of the Act. Accordingly in exercise of the powers conferred upon me in terms of Rule 5 of SEBI (Procedure for holding inquiry and Imposing penalties by the Adjudicating Officer) Rules, 1995, I consider it appropriate to impose a penalty of Rs.1,50,000 only (Rupees one lakh fifty thousand only) on M/s Chothani Growth & Investments Private Limited. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties

 

remittable to the Government of India” and payable at Mumbai which may be sent to Smt Usha Narayanan, Chief General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.

 

PLACE: MUMBAI	G. BABITA RAYUDU
DATE: JANUARY 31, 2006	ADJUDICATING OFFICER