SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
UNDER REGULATION 13(4) SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGAINST M/s KARUR MAV FINANCIAL SERVICES, THE SUB BROKER FOR ITS TRANSACTIONS IN THE SCRIP OF KARUR VYSYA BANK LTD.
BACKGROUND
1. Karur Mav Financial Services (hereinafter referred to as ‘sub broker’) is a sub broker of Anush Shares & Securities Pvt. Ltd. It is an entity connected to Shri M K Srinivasan, Director of Karur Vysya Bank (hereinafter referred to as KVB) as his wife viz., M S Jeevarekha is one of the partners of the sub broker. The registration No. of the sub broker being INS 04390127 (MSE) and INS 231094629 (NSE).
2. Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted an investigation which revealed the violations committed by the sub broker.
3. SEBI vide order dated 17.10.2003 appointed an Enquiry Officer under the provisions of Regulation 5 of SEBI (procedure for holding enquiry by enquiry officer and imposing penalty) Regulations, 2002 (hereinafter referred to as the said “Regulations”) to inquire into the alleged dealings done by the sub broker in the shares of KVB and also the possible violations of the provisions of SEBI Act, 1992 SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as Stock Brokers Regulations)
ENQUIRY REPORT AND RECOMMENDATION
4. The enquiry officer, after conducting the enquiry as per the procedure laid down in the said Regulations, submitted the report dated September 20, 2005. The Enquiry Officer found that the sub broker had not exercised due care and caution and the conduct of the sub broker was in violation of Clause A (1) and (2) and Clause B(5) of Code of Conduct specified in Schedule II read with regulation 15 of the stock broker regulations and recommended a minor penalty of ‘Censure’ against the sub-broker.
SHOW-CAUSE NOTICE AND REPLY
5. A Show Cause Notice (SCN) dated September 27, 2005 was issued to the sub-broker along with a copy of the Enquiry Report, calling upon it to show cause, in terms of Regulation 13(2) of the Regulations, as to why the penalty as recommended by the Enquiry Officer should not be imposed against it. The sub broker received the show cause notice dated September 27, 2005 and failed to submit its reply. Hence another letter dated October 24, 2005 advising the sub broker to reply within 31.10.2005 was sent to it. Despite that, the sub broker did not submit any reply to the show cause notice dated September 27, 2005.
CONSIDERATION OF ISSUES AND OBSERVATIONS
6. I have considered the facts of the case, the findings of the Enquiry Officer and note the significant point as under;
7. The sub broker is a partnership firm having partners namely Shri M R Balaji Narasimhan, Shri M A Raghunathan,Smt. R Varalakshmi, Smt. B Lakshmi, Smt. M S Jeevarekha and Smt. M V Usha. I observe that the price of shares of KVB rose from Rs.340 to Rs.400 per share on the basis of information of bonus issue during March 2001. The sub broker had traded in the scrip of KVB during the relevant time for its clients.
8. I further observe from the client registration forms that Shri M S Giridharan was a student with no known source of income. The sub broker had allowed him to take position beyond his means and the debit balance in Shri Giridharan’s account was over Rs.1 crore.
9. I observe that the client registration form of Shri Giridharan did not make any mention of annual income and the statement of accounts of him showed a debit balance of Rs.1,14,55,551/-. No details of the properties owned by him have been submitted. Moreover, the sub broker had admitted that Shri Giridharan is the son of one of their partners and that he was a student but had properties. The sub-broker had failed to submit details of the properties of the client to show the networth of the client. Thus, I find that, the sub broker dealt with Shri Giridharan despite knowing that he had no steady source of income on the assumption that he would be able to settle the dues as he had property. I observe that the sub broker entertained its client without knowing its client’s networth inasmuch as Shri Giridharan failed to honor its commitment to the sub broker. At this juncture, I note that B(5) of the code of conduct for sub-brokers of stock broker regulations read as under;
B. Duty to the Investor.
“5. Business of Defaulting clients: A sub broker shall not deal or transact business knowingly, directly or indirectly or execute an order for a client who has failed to carry out his commitments in relation to securities and is in default with another broker or sub-broker.”
In view of the above, I hold that sub broker is guilty of violating the provisions of B(5) of the code of conduct of stock broker regulations.
10. I note that A(1) and (2) of the code of conduct for sub-brokers of stock broker regulations read as under;
A. General
“(1) Integrity : A sub-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all investment business.
(2) Exercise Of Due Skill And Care : A sub-broker, shall act with due skill, care and diligence in the conduct of all investment business.”
11. Thus, I observe that the sub broker has failed to exercise due skill, care and diligence in dealing with its client and has violated Clauses A (1) and (2) of Code of Conduct of stock broker regulations.
12. I further observe that with regard to advances made to a client E Jagannathan, the sub broker admitted that there were few stray instances of its accommodating a client when he was in need of money for a day or two. I observe that, the sub broker had submitted that the advance was for a couple of days and E. Jagannathan had repaid the amount promptly. Enquiry officer finds that it is an isolated incident and a lenient view may be taken.
13. With reference to the allegation that the sub broker aided and abetted its clients and had also acted in concert with clients who are related to KVB in the creation of false market or misleading appearance of trading in the market, it is observed that the sub broker is connected to Shri M.K.Srinivasan, Director of KVB as the latter’s wife is one of the partners of Sub broker.
14. The Investigation Report reveals that KVB had announced a bonus-cum-rights issue in March 2001 and that there could be a possibility of trading on the basis of unpublished price sensitive information. The sub broker had traded for Shri Giridharan who is the son of Shri M.K.Srinivasan, Director of KVB. There could be a possibility for Shri. Srinivasan to trade in the name of his son as the client registration form showed Shri Giridharan as a student with no regular source of income. Shri. M R Balaji Narasimhan, who represented the sub broker before the enquiry officer, also confirmed that Shri Srinivasan used to place orders on behalf of his son. Moreover, the ledger account of Shri Giridharan showed a debit balance of over Rs.1 crore and also his account was never settled. The Enquiry Officer finds that this per se does not establish that there was a fraud or market manipulation or that the sub broker aided and abetted the same but reflects on the conduct of the sub broker indicating its carelessness resulting in the breach of Clauses A (1) and (2) of Code of Conduct prescribed under Regulation 15 and specified in Schedule II of the “Stock Broker Regulations”.
15. Enquiry Officer thus finds the action of the sub broker not in consonance with what is required in terms of clause A(1), (2) and B (5) of the Code of Conduct of Stock Broker Regulations and recommended minor penalty of censure against the sub broker. I do not find any reason to take a different view in the matter.
ORDER
16. Therefore, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of said Regulations, I hereby impose a minor penalty of ‘Censure’ against the sub broker, Karur Mav Financial Services and direct it to be more cautious in dealing with securities and to adhere to the provisions of SEBI Act, 1992 and the Rules, Regulations made thereunder. Any future lapse in this regard would invite stringent action.
17.This order shall come into force with immediate effect.
| DATE :13-1-2006 |
MADHUKAR |
| PLACE : MUMBAI |
WHOLE TIME MEMBER |
| |
SECURITIES AND EXCHANGE BOARD OF INDIA |